Jul 12, 2022

The bears may have taken over the financial markets for now, but we see a lot of positive momentum, optimism, and budget for compliance teams in 2022 and beyond to efficiently run and continue to provide important guidance, oversight, and support to mitigate regulatory risk at firms. Reflecting on the different perspectives and insights offered by Cutter experts, vendors, and members at our recent Modern Compliance Member Meeting, investment management professionals should feel good about their compliance program capabilities and continue to strive for improvement.

Running a modern compliance function is more complex than ever, with many areas of responsibility to mitigate risk across the enterprise ─ something that firms cannot achieve without compliance expertise, proactive compliance efforts, support from senior management, and utilization of modern technology. Below you’ll find highlights from each meeting session.

Modern Compliance Benchmark Survey Results Revealed: The Power of Knowing Where You Stand

In our first session, we reviewed compliance capabilities across the following five main areas:

  • Investment Guideline/Trading Compliance
  • Regulatory Guidance and Advice
  • Managing Business Conduct
  • Compliance Program Management
  • Marketing Compliance

As our benchmarking survey findings revealed, compliance leaders can likely do more, particularly for asset owners, in many areas of their compliance programs. Asset managers have very solid programs, but some firms in the survey still fell into the “Defined” and “Reactive” categories in certain areas ─ meaning there’s room for improvement. For all participants, we strongly recommend taking the opportunity to review areas where the findings showed your firm lagging the competition. Your analysis will identify areas for improvement in order for you to make recommendations to senior management. Ultimately, you can strive to secure support (often in the form of IT budget) for enhancements to processes and technology or to get buy-in that the firm feels comfortable with the current state. For those who didn’t participate and receive a customized report, the general findings are available here.

Electronic Communication Surveillance: Technology Can Help

We were joined by Nader Shwayhat, Global Head of Compliance, Collaboration, and Surveillance Solutions at Bloomberg, and Jordan Domash, General Manager from Relativity Trace, who discussed the drivers behind why electronic communication (eComms) surveillance is a relevant compliance area of focus right now.

Our panel discussed the increased volume of eComms and the number of different eComms channels used to conduct business. The need for eComms is highlighted by a remote and distributed workforce and recent headlines citing inquiries from regulators about eComms surveillance efforts in the financial industry. Significant improvements have been made to today’s eComms surveillance tools, including the ability to ingest many types of communications/data and providing clients with out-of-the-box searches to conduct surveillance.

Firms can use AI technologies such as machine learning (ML) and natural language processing (NLP) to reduce false positives and prioritize result reviews. Asset managers and owners should be looking at the eComms surveillance vendor landscape to understand more about how you can use AI to conduct eComms surveillance efficiently to manage real risks in this increasingly important compliance area.

Investment Guideline Compliance Continues to Be Risky Business

Lori Bosi, Director of Investment Compliance at MFS, and Matt Grinnell, Global Product Manager for Linedata Compliance and Oversight Solutions, joined us for a discussion on best practices in the investment guideline space. To get a fresh understanding of automation and functionality currently supported in their guideline compliance systems, firms should reach out to their vendors to discuss testing gaps and challenges.

The goal of compliance is to strive for 100% automation, and the most effective compliance teams have a very good relationship with their vendor. Your vendor can be your best friend.

— Matt Grinnell, Global Product Manager, Linedata

Such discussions can help close testing gaps, influence product road maps, and improve your controls. An example of using automation to improve your controls relates to creating new investment guideline rules. When looking at the Cutter Benchmarking survey results, only 54% of firms responded that they use an automated four-eyes review of new investment guideline rules or edits made to their existing rules. Firms should consider this as a basic requirement for managing and maintaining any system, and most if not all vendors have this capability. We recommend reaching out to your vendor to find out how you can turn this feature on and reduce your firm’s regulatory and financial risk.

Compliance plays an extremely important role during the client onboarding process. It is critical that compliance has a seat at the table to negotiate guidelines and educate both client-facing staff and portfolio management on what is testable and what is not. Non-compliance with such manual restrictions introduces financial, regulatory, and reputational risks to your firm. Be sure to document and communicate what you can and cannot test from a systems perspective, along with the potential financial impact of non-compliance with guidelines that can’t be coded.

Frequently performing ongoing account coding reviews is another important best practice. Vendors are innovating and offering new technologies like NLP and ML capabilities to support the automation of this manual and resource-intensive process.

It is essential to perform periodic and ongoing account reconciliations of guidelines to rules and positions to rules. This is a place where we should all be doing more.

Lori Bosi, Director of Investment Compliance, MFS

That’s a Wrap

We’ve been in the compliance business long enough to know that priorities can shift quickly. But we hope that we have given you some information to help with your 2022-2023 initiatives and planning cycle to keep your compliance programs moving forward with better processes and technology.

To learn more, the Modern Compliance Member Meeting replay is now available along with the Modern Compliance Benchmarking Report.