Compliance

02:20 PM
George L. Stevens, Beacon Hill Fund Services
George L. Stevens, Beacon Hill Fund Services
Commentary
50%
50%

Mutual Funds: How To Find The Right Compliance and Financial Officer

Regulation has led fund boards to reconsider the traditional roles played by financial officers and compliance officers.

The last ten years have been rough for the mutual fund industry. The mutual fund scandals of 2003 stemming from the discovery of illegal late trading and market timing practices led to a substantially more demanding regulatory environment.

George L. Stevens
George L. Stevens, Beacon Hill Fund Services

As a result, fund boards are now required to designate a compliance officer and implement a comprehensive compliance program. Meanwhile, the Sarbanes-Oxley legislation, which brought a dramatic increase in the number and complexity of financial filings, as well as the 2008 financial downturn with the resulting market volatility, have led fund boards to reconsider the traditional roles played by fund officers, including the chief financial offer, and service providers.

From its earliest beginnings, the mutual fund business model has relied upon outsourcing virtually all its activities. Funds usually have no employees of their own. Each function within a mutual fund, from the investment management delivered by the investment adviser, to accounting, safekeeping of the securities and the preparation and delivery of shareholder statements, is performed by a different organization that specializes in each service.

Since funds are externally managed, it is not unusual for the fund's investment adviser or administrator to provide the people to serve as officers to the fund. This seems to be changing, however, as fund boards see a need for experienced, highly qualified compliance and financial officers who are independent of the fund's service providers. Most service organizations no longer wish to assume the risk and overall responsibility of having their employees serve in these roles because of the personal and corporate liability of the position.

Investment management organizations typically focus on security selection, through market research and financial analysis of individual markets and companies. While mutual funds are the embodiment of the investment management skill, it is often the case that the investment advisor is also leveraging its resources to support various other investment products such as separately managed accounts and alternative investment products.

A compliance program must constantly evolve in response to changing regulatory requirements and business risks, new, more complex product offerings and evolving technology.

However, investment firms are not always prepared to provide a qualified person who can focus on a mutual fund's compliance requirements. In many firms, the financial and accounting personnel may not have the specific familiarity and experience to meet the needs and expectations of the role, and when they do, they often are challenged with available time to focus on maintaining this knowledge in the dynamic and evolving regulatory landscape.

Qualified and experienced people who can fill these roles are available in today's marketplace ­— people with specific knowledge of mutual fund accounting and financial administration and reporting, of applicable rules and regulations governing open-end mutual funds, and of the interplay of the service providers involved in fund operations and the role and responsibilities of the fund board.

In addition to overseeing a fund's compliance policies and procedures, the compliance officer is expected to take measures to assure that each service provider has implemented effective compliance policies and procedures that are administered by competent personnel. Transparency and candor are important in any discourse about compliance. Anything short of it may detract from a relationship of trust between the board and the compliance officer.

[For Exchanges, It’s Time To Shape Up and Spend More on Tech.]

While there is no one right approach to compliance, the value of independence in this role is becoming increasingly clear to fund boards. While many of the functional activities of the financial officer of a fund have remained the same, other duties and responsibilities have been mandated and the resultant liability for failure to properly oversee and comply has increased. The increase in visibility, accountability, and liability of a fund financial officer has been a significant reason most fund accounting agents serving the mutual fund industry no longer provide employees to serve their clients in this capacity.

Mutual funds are increasingly complex, intensively regulated investment products that are highly transparent both to investors and regulators. Conscientious, knowledgeable, and resourceful personnel, armed with appropriate resources, are key contributors to an effective effort by funds to meet the requirements of today's compliance and financial reporting environment.

George L. Stevens is the director CCO, Beacon Hill Fund Services, and has thirty years of experience in the bank trust and mutual fund industry. His background includes legal, compliance and regulatory functions, with specialized expertise in bank common and collective fund conversions to mutual funds. He has extensive knowledge and experience in all aspects of the client's CCO program, including maintaining policies and procedures of the compliance program pursuant to Rule 38a-1 and service provider testing and reporting.

Comment  | 
Print  | 
More Insights
More Commentary
Survey Shows an Urgency to Automate the Back Office
Confluence reports numbers are trending up across the board when discussing the need to automate back-office processes.
7 Pillars of Market Surveillance 2.0
Compliance officers are facing flash crashes, insider trading, market manipulation, and more. Here are seven market surveillance and risk management steps that will help compliance officers sleep better at night.
Stop, Rethink & Recalibrate: A View From Asia Pacific
Technology has made the human element of high- and low-touch trading almost indistinguishable. Brokers can no longer compete on price. Instead, they should build toward user experience and value of outcome.
The Sentient Enterprise: Data Driven as a Strategy, Not a Tactic
Can capital markets take a tip from front-to-back-office customer execution efficiencies and apply it to the investment process?
Dig Deeper for Data: Enriching Wealth Management With New Market Insight
To compete, wealth firms are providing direct electronic access to the content. Exposing the information to their clients is driving an evolution of the traditional advisor value proposition.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.