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Compliance

03:08 PM
Paul Allen
Paul Allen
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Custodians Target Compliance

Firms that lack the technology, data or manpower to monitor compliance are looking to their custodian services for relief.

Alternatively, BBH can provide a more sophisticated level of service that includes support for the chief compliance officer "where we are putting together an entire compliance program, not only for the mutual fund, but to assist the adviser as well," Caron says. "So we could act as a reporting agent, or almost as an extension of their shop, depending on a client's needs."

Partners in Compliance

Northern Trust introduced its automated compliance monitoring capability in 1996. "At Northern Trust, compliance experts conduct a detailed analysis with each of our clients to help them review and refine their guidelines," says Matthew Tushman, the firm's vice president, institutional product development. "We partner with our clients and add value by helping them fulfill their fiduciary responsibility to maintain proper oversight of their investment programs. We offer varied service levels to meet the specific needs of our clients, including a fully outsourced compliance monitoring service, which allows clients to focus resources directly on how to respond to guideline violations."

Northern Trust Compliance Analyst, the firm's main compliance monitoring product, helps clients handle compliance in-house. It allows investment program managers to monitor asset allocation, issuer concentration, sector and industry limits, credit quality, duration, equity characteristics, leverage, and country and regional exposures, notes Tushman. "Accounting data is fed directly from our custodial accounting system nightly, and clients' portfolios are checked each day. If an investment parameter is breached, clients are notified via e-mail and Passport, our institutional Web portal." In addition, the firm offers Northern Trust Alerts+, a customized service that allows clients to outsource the entire compliance monitoring function to Northern Trust.

Without an automated monitoring solution or an outsourced compliance function, there is no effective way to monitor investment manager guideline adherence, asserts Tushman. "Scanning asset lists and transaction statements might catch some guideline violations, but those are very time-consuming tasks and likely to provide limited value," he says. "Frankly, many plan sponsors simply delegated compliance monitoring to their money managers, which, from a fiduciary oversight perspective, is not the ideal way to monitor adherence."

Full-Service Solution

JPMorgan also provides a compliance service to clients. The capability is provided through regional compliance-reporting service teams, which work with clients to set up the service, build the rules and customize reports, and support the application daily, notes Neil Henderson, senior vice president and securities processing and fund services executive for JPMorgan Investor Services. "Through our integrated full-service approach, compliance officers, fund managers, trustees and investment officers can quickly determine portfolios that are not in compliance with the pre-agreed rules, and monitor and manage the resolution process," he says.

JPMorgan's service gives clients information on compliance violations according to pre-defined portfolio investment guidelines, regulatory restrictions and in-house exposure limits, Henderson continues. The rule capability incorporates exposures from derivatives, issuers and counterparties, and includes fund look-through and benchmark functionality. Tests can be run at the portfolio, sub-composite or total composite level, Henderson adds. Clients can then view and manage compliance events through JPMorgan Access, the firm's Web-based platform.

"The service is seamlessly integrated with JPMorgan's and third-party's accounting systems and offers an integrated workflow process for violation analysis and resolution," Henderson says. Supported by the service, clients can reduce the workload resulting from manual compliance checks in the middle and back office and decrease overall operational risk, he adds.

As compliance standards continue to rise, they will increase the pressure on market participants to not only improve their compliance processes to meet today's requirements, but to continue improving them. One area of prospective development among compliance service providers is pre-trade compliance. In the past, third-party compliance providers have offered post-trade compliance, a reactive process which checks trades after they have been executed, according to BBH's Caron. "I see the industry moving toward pre-trade compliance, where, as a fund administration provider, we will be able to connect with trading systems and test and report immediately," he says.

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