Jun 07, 2022

Front-to-back-office business areas at investment management firms use many sleek and savvy technology solutions. Surprisingly, I think compliance departments haven’t gained any momentum in adopting modern technology and, in fact, have fallen behind the curve in the use of technology compared with their colleagues in other departments.

When people think about compliance systems, they typically think about investment guideline compliance systems. Firms use these important systems to stay compliant with regulatory and client requirements and reduce their regulatory, reputational, and financial risks. Firms also employ systems to monitor conflict-of-interest situations, such as personal trading, gifts and entertainment, and political contributions. Most often, though, investment management firms use multiple systems from different vendors for each component, but the systems don’t talk to each other. This approach gets the job done from a basic perspective, but it’s certainly not scalable for getting a good handle on the overall status of your compliance program at any given time.

Lastly, most but not all firms have a tool that allows them to surveil electronic communications, a rapidly developing area, thanks to the addition of AI which reduces the number of false positive results as well as makes connections that no human could possibly uncover. If your firm is large and complex in terms of offering many different strategies or connected to a brokerage firm/investment banking firm, I don’t know how you can sleep well at night as a compliance professional without a modern technology solution in this space.

Compliance Tool Recommendations

I offer the following two pieces of advice to gain momentum and to implement modern compliance systems:

  1. Take sales calls from vendors and accept their offer for a product demo! You can glean considerable intelligence from vendors about what your competitors are doing. These demos inform your future compliance technology strategy and help you set next year’s budget.
  2. Consider your pain points. What tasks take excessive time? What compliance issues concern you the most from a risk perspective? We all have risk appetites. What’s on your plate that carries too much risk and makes you uncomfortable? Focus on these areas for your technology spend.

Compliance Pain Points and Technology Options

Below, I list some areas to review, where you should consider asking for support to implement modern technology. While not an exhaustive list by any stretch of the imagination, it should help you think about your firm’s pain points, do a little research, and get you ready to ask for the appropriate budget to strengthen your compliance program. As you consider your options, prepare to demonstrate efficiencies and cost reductions to your CFO. Even if your funding requests were denied in the past, continue to recommend improvements that will strengthen your compliance program. That said, I believe the following areas are ripe for automation:

Trade Surveillance

Firms subject to the UK Market Abuse Regulation or those with active equity traders require tools to monitor trading activity that look for anomalies that may signal insider trading. Trade surveillance tools not only can detect potential insider trading issues, but also other forms of market manipulation. If your firm does not implement this type of solution in the next few years, you’ll fall behind from a compliance perspective and potentially face greater regulatory exposure. However, such solutions currently target larger shops (with deeper pockets). Smaller shops may find current trade surveillance solutions priced out of their reach.

Advertising Review Automation

Smaller firms may think that trading emails back and forth functions as an advertising review system, but this approach doesn’t scale and certainly lacks any reporting function needed to respond to document requests from the SEC. Establishing an integrated solution between sales, marketing, and compliance to facilitate the approval process is a fundamental requirement for most firms. Such tools are beginning to include AI capabilities for functions such as material review. When AI is more broadly adopted and operational, this could mark a huge leap forward in efficiency for compliance. But for now, the technology and use cases are nascent.

Management Tools

Imagine knowing the status of all your compliance programs in a single pane of glass. It may sound like a fantasy, but the technology exists and is available on the market. In fact, firms can build such compliance dashboards or buy them off the shelf.

Compliance dashboards can monitor these areas:

  • Annual policy and procedure review
  • Marketing material review process
  • Code of ethics issues
  • Current risk assessment
  • Trading issues

Some firms that I discuss dashboards with see this as the holy grail of governance, risk management, and compliance (GRC). Dashboard metrics give you a real-time view of your compliance program in action and provide clarity on where your compliance program excels and where it’s deficient.

Regulatory Reporting

Many firms use in-house solutions to support regulatory reporting. In some countries, failure to notify regulators when your firm hits governmental ownership threshold limits has both financial and potential regulatory consequences, including fines and suspension from trading in certain countries. As you might guess, technology that tracks holding limits and reporting obligations is a must-have. Such solutions aggregate holdings firmwide by issuer to determine if your firm needs to complete a filing to the various global governmental regulators. Without an automated solution, the process is extremely difficult and error-prone.

Risk Assessments

Several incredibly good tools in the GRC space can automate performing a risk assessment. Such tools include features like data visualization that can plot the probability and impact of all your firm's risks on a bubble graph. This capability allows compliance leaders to show the CEO and other department heads where the firm’s risks exist, along with action items to reduce risks. Once you’ve seen data in this format in action, I have no doubt that you’ll use these risk assessment tools as a cornerstone of your compliance program.

Firms today have a host of new compliance tools available to them. I recommend that you learn more about their capabilities and use this knowledge to set a strategy for modernizing your compliance program.

Want to learn more or speak with a Cutter consultant? Contact us at [email protected].