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A Review of August’s NAV Issues

In a recent paper, Barrington Partners offers an in-depth look into the NAV issues experienced by many funds after the failure of a service provider in August. Barrington compiled the report following discussions with fund groups that were directly affected by the failure and also those that were not.

The paper explains that the incident began with a failed Saturday morning system update that had been successfully applied on other system installations. The install failure was compounded by an unfinished backup of the system that prevented system administrators from reverting to the system’s most recent backup. With the system still not functioning by Monday morning, the service provider informed its customers of the issue, but indicated that it would be operational in time to calculate that day’s NAV. By 3 or 4pm, firms began to suspect that they would be unable to publish a NAV for the day.

The service provider was not able to provide manually calculated estimated NAVs for Monday until Wednesday. By Saturday, the service provider had completed rebuilding the system and began recalculating NAVs. By the time Monday’s NAV was due, the service provider was back on schedule.

According to Barrington, the events provided an opportunity to examine “the differences between what firms ‘think they should do’ and what firms in the midst of the situation found they ‘needed to do’ to manage each day in an extraordinary week.” Barrington reports that firms learned a number of lessons:

  1. Conduct a review of Service Provider contracts, liability clauses and Service Level Agreements (‘SLAs’) to determine if there is a change in liability if the fund company releases its own NAV in the event that the Service Provider is unable to do so.
  2. Discuss with Service Provider(s) their back-up processes. Fund companies prefer a full daily back-up to a different server than the main operating system.
  3. If your firm uses a Service Provider, request documentation on their contingency plan in case their core accounting system suffers a shut-down. Review this plan with your Service Provider.
  4. Does your firm have a contingency plan? Many contingency plans focus on the internal operations. However, contingency plans should also address ‘critical vendors’.
  5. Review the process that the fund company uses to calculate the full or shadow NAV. Maintain the daily tracking of the shadow method against the Service Provider. Additionally, firms should test their shadow rate on successive days when not compared against the official NAV.
  6. Firms that do not have a shadow accounting process should perform a cost benefit analysis. Occurrences such the events described in this document are fortunately very rare. However, approaches such as suggestion #9 could provide a low cost back-up.
  7. Develop an internal communications process. Information about an event such as this needs to be communicated to many areas within a fund company, which may span many locations. Staff, management, distribution, pricing committees and trustees all need to be informed about the issue in a timely manner.
  8. Develop a thoughtful external communication protocol. Talking to intermediaries is critical and conversations should start early. Be aware that other vendors, the press and direct customers also may need to receive information at various intervals.
  9. Develop a bespoke benchmark (or standard depending on the fund) for each fund that makes it easier to calculate the impact of market movement.
  10. While legal concerns are always raised in a situation such as this, impacted firms say that it is more important to communicate honestly with business partners like intermediaries than to let legal concerns impede constructive business communication. Firms acknowledge that legal concerns tend to win out in the planning. However, in the middle of a situation such as this one, legal concerns cannot be the first consideration.
  11. Quickly reach out to other impacted firms to ascertain if they have information or approaches that may be helpful. Fund firms are considering the employment of standing instructions with Service Providers so that in the event of a failure the Provider will supply the names of other affected firms.
  12. Keep your own updated copy of NAV distribution lists and contact information. Service Providers may normally be responsible for NAV distribution, and as a result they have the current list. When the fund company tried to distribute the NAVs in the situation described above, they discovered that they either had an old list or no list.
  13. Put into place a plan regarding press inquiries. Have a plan and process to draft and approve a press release.
  14. Prepare to have a flash website where your firm publishes NAVs for intermediaries, direct clients and other interested parties.
  15. Determine how to test your Service Provider’s Disaster Recovery process. Require your Service Provider to run actual tests on a regular basis.
  16. Prepare and document a contingency plan for various situations so that it can quickly be put into action. Review and update the plan at pre-determined internals. Make sure that staff understands their role and have the requisite training.