Technology and Compliance in Modern Day Asset Management
Minority Report -The movie opens with actor Tom Cruise – a futuristic law enforcement officer named John Anderton–madly swiping through virtual screens of data and images for a soon to be committed murder. Minutes later Cruise and his Pre-Crime team jet to the crime scene to apprehend the perpetrator a moment before he plunges scissors into his wife’s chest, thus preventing the murder from happening.
Technology and its use in the asset management industry have not yet reached this frontier. Technology, however, is a key component of asset management, integral to many aspects of the investment process including: compliance, risk management, client service, research, trading, and operations. Given today’s information-rich environment and the importance of automation in accessing markets, asset managers are utilizing artificial intelligence (AI) and machine learning (ML), block chain and distributed ledger(DL), and robotics and robotic process automation (RPA).
As chief compliance officers (CCOs) assess needs for compliance programs, plan improvements, and evaluate associated costs and budget impacts, CCOs have come to recognize that technology can make their programs more effective and more efficient
As chief compliance officers (CCOs) assess needs for compliance programs, plan improvements, and evaluate associated costs and budget impacts, CCOs have come to recognize that technology can make their programs more effective and more efficient. Recently Marshall Sprung, The Blackstone Group’s Global Head of Compliance, noted the growing importance of technology in compliance. “As our firm grows in size and complexity, it is vital that our people have the technology they need,” he said. “We formed a Legal and Compliance Technology Steering Committee to facilitated Collaboration between our compliance and technology groups and determine our priorities in the technology area.”
Technology can help utilize existing compliance resources and can extend the breadth and depth of compliance coverage. The compliance department, like other teams at the firm, can leverage technology to automate manual processes, track regulatory changes, manage third party oversight, maintain audit trails, and retain books and records.
More and more, regulators, customers, consultants, and prospects expect to see technology integrated into compliance programs as both a means of achieving and demonstrating a commitment to compliance and a culture of compliance. In the face of growing customer and regulatory demands for information and reporting, technology can assist with timely production of key indicia of the operation of the compliance program. In addition, boards of directors, audit committees, and executive management are demanding more assurance with respect to compliance as they are asked to report on, certify, or oversee the effectiveness of the compliance program. Technology and its use can assist in making, verifying, and delivering representations regarding compliance programs to a wide variety of audiences.
There are several ways in which technology can be utilized in a compliance program. Four of those ways include: portfolio compliance, vendor oversight, regulatory change management, and books and records. In each of these areas, there are a number of technology solutions which are discussed below with capabilities to search, monitor, manage, test, report, and retain required regulatory information.
PORTFOLIO COMPLIANCE: Monitoring and analyzing trading and investment activities are essential to detecting possible deviations or violations of regulatory requirements, investment guidelines, risk tolerances, and firm policies. Trade surveillance often occurs before and after a trade. Order management systems typically contain controls which are coded into the system to enforce such restrictions as credit limits, country of issue, concentrations, and allocations. In real time, these systems can be configured to stop trades that potentially violate a compliance policy or simply to alert the trader and/or compliance professional of such activity. After the stoppage or alert, the user can efficiently document action taken to resolve the issue or escalate the issue via email or other means. System controls are also typically run overnight to check for any violations or potential violations. Exception reports are produced and reviewed. Records in each instance are archived, providing an audit trail that can be easily retrievable.
VENDOR OVERSIGHT: Most asset managers outsource some portion of their operations or related activities to third parties focusing instead on their core competency of picking securities and delivering outstand performance. Functions which may be outsourced to a third party include: trade notification, confirmation, and affirmation; settlement; error correction; and price and reference data verification. Asset managers must conduct due diligence and maintain oversight of such third party service providers. Technology can help manage this process. When onboarding a new vendor, firms can use software which tracks service level requirements and contractual provisions, provides management and board reporting, risk ranks vendors and their activities, and delivers monthly, quarterly, or annual questionnaires and certifications. These tasks can be tracked and where in- complete the system will send out notifications and reminders escalating the urgency as a pending reporting or other deadline approaches.
REGULATORY CHANGE MANAGEMENT: Asset managers are often operating in global markets and are therefore subject to regulatory oversight in multiple jurisdictions. A regulatory change management program can be used to keep track of regulatory changes and new requirements offering end-to-end compliance in an increasingly more complex and fast paced environment. Instead of one individual or department being responsible for the changes and updating them manually, it can be automated. Through the use of technology, asset managers can map policies and processes to existing rules and requirements. As those rules and requirements from regulators change, the system can alert and indeed recommend changes to an asset manager’s policies and procedures to correspond to the new regulatory guidance. As former CFTC Chair Christopher Giancarlo stated “the ability to digitize rule-sets and consume, process, and analyze data in real-time could very well be the capability that allows us to explore application of so-called ‘agile regulation.’ As machines assume more economic tasks and functions, we would expect that these machines can be programmed with rules that ensure compliance with laws and regulations.”
BOOKS AND RECORDS: Asset managers are required to maintain and retain a tremendous amount of information pertaining to their businesses.That information includes: audit records; operational reports; legal contracts; trade documents including original trade instructions, trade tickets, and trade confirmations; communications and marketing materials with existing and prospective customers as well as other documentation which evidences the controls, policies, procedures, and processesof the firm. In addition to initially capturing and retaining such records, safeguards must be in place which is reasonably designed to ensure maintenance, version control, readily retrievable, searchable, physical and electronic safety, restrict access, regular backup, and systematic timed destruction. Many of these records will be inherently captured and retained through various front-office systems. However, not all documents are captured in this way and through such systems. Therefore, there may be a need to develop or to acquire an enterprise content management system.
CONCLUSION: Technology has expanded the role of compliance and compliance officers within asset managers. It has also raised the expectations with regard to what is and what is not possible. The ability to leverage technology through the gathering, retaining, searching, and crunching mass amounts and variety of data enable compliance teams to move from being more reactive in nature to more proactive in nature. The predictive analytics Pre-Crime world of the movie Minority Report are not yet here but technology is moving compliance departments in that direction.