Compliance

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

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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.

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