Compliance Newsflashes: London Firms Not Ready for MiFID, Asset Managers Invest in Compliance

London Firms Unprepared for MiFID

Currently, the London investment community is largely unprepared for full implementation of the Markets in Financial Instruments Directive (MiFID) on April 30, 2007. According to a survey of 35 London-based firms, 80 percent of particpants said that their organization either does not have a MiFID compliance framework in place, or if it did, they did not know about it.

The study conducted by consultant firm Riversix (sponsored by BT Radianz, Oracle, and Standard and Poor's) on behalf of the MiFID Joint Working Group measures the readiness of London investment firms to meet the technological challenges imposed by MiFID.

The MiFID directive presents technological hurdles ranging from operation risk and availability of service to the primary challenge — the ability to demonstrate the best execution of client orders. Investment firms will be obligated to publish quotes for shares in standard market size, and these quotes are to be made available to other market participants.

"Investment firms find themselves becoming much more like a quote vendor or exchange, but with the additional requirement of polling other market participants' prices in order to prove their own best execution obligations have been met," states the report.

Despite the current lack of preparedness, many firms have begun considering the future impacts of MiFID. The survey reports that 44 percent of participants are budgeting for MiFID compliance initiatives in 2006, and 60 percent of firms have assigned a full-time staff to work on developing a compliance framework.

Asset Managers Increase Compliance Spending

Asset managers are investing in compliance efforts and have expanded, in some cases doubling, their staffs to meet new regulatory obligations by the SEC under the Investment Advisers Act, according to a survey conducted by CFA Institute and the Investment Adviser Association (IAA).

The survey reports that the average number of employees assigned, in whole or part, to compliance functions increased from one to "two to four." The percentage of participants reporting a staff of "two to four" rose from 31 percent in 2004 to 43 percent in 2005.

CFA Institute and IAA also report that between 2004 and 2005 compliance costs for asset managers more than doubled. The average expenditure in 2004 was $144,394 as compared to $221,900 in 2005, an increase of 54 percent.

"Asset managers must develop programs that detect and prevent violations of the Investment Advisers Act," said Jeff Diermeier, president and CEO of CFA Institute, in a release. "It's clear from the survey that significant resources must be devoted in order to develop an effective compliance program."

The Investment Advisers Act requires the registration of certain investment advisers with the SEC. The covers matters including record keeping, substantive content of advisory contracts, advertising, custody of client funds and assets, and proxy voting. Last year, the SEC approved a rule, effective Feb. 1, 2006, requiring most hedge fun managers to register under the Investment Advisers Act.