Making compliance a priority must be a focus for everyone. It is no longer possible to relegate regulatory issues to a compliance officer laboring in the shadows.
A heightened regulatory environment and increased investor demands are prompting many US asset managers to redesign their operating models.
Hedge funds and private equity firms: under the radar
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) brings nearly all US hedge funds and private equity firms under the purview of the Securities and Exchange Commission (SEC), greatly increasing their compliance requirements. At the same time, the Foreign Account Tax Compliance Act (FATCA) calls for detailed disclosure of investor information.
The greatest concerns motivating US asset managers to take action include:
- How the new era of regulation will affect the asset manager's performance.
- How new regulations will improve funds' corporate governance, disclosure and transparency.
- The reliability of asset managers' third-party administrators and other external service providers.
- If an organization's controls over difficult-to-price assets will be adequate.
Before responding, asset managers should step back and take a holistic view of how investor expectations and the new regulatory mandates will impact their businesses.
How US asset managers are building a culture of compliance
The impact of the new regulations will ripple throughout asset manager's operating models. Organizationally, compliance departments will likely expand in size and scope. Functionally, firms' operational relationships with, and expectations of, their administrators and counterparties will need to be clarified and possibly modified to ensure each party agrees to the distribution of responsibilities for meeting the regulatory and investor mandates.
To create a culture of compliance from the top down, the board, the CEO and other senior executives must be directly involved and engaged. An integrated response to regulatory initiatives could generate significant business advantages.
Making compliance a priority must be a focus for everyone, particularly senior leaders since they are best positioned to build working relationships with regulators and are armed with a complete organizational perspective. It is no longer possible to relegate regulatory issues to a compliance officer laboring in the shadows.
Industry responds to rising expectations from investors and regulators
Advanced compliance and risk management expertise that might have distinguished a firm a few years ago now just "gets you in the game". Satisfying rising investor expectations, as well as new regulation requirements, can prove very costly, especially for an industry still recovering from the financial crisis.
In many cases, IT infrastructure will need to be improved to allow prices and risk metrics to be gathered from trusted sources and to be more rapidly reported to regulators and investors. Also, data architecture must be flexible enough to maintain more granular records and produce them on demand.
These heightened demands can lead to logistical headaches and operational challenges extracting and managing the necessary data. Asset managers must ensure they are capturing all the data they have to report and that it is consistent across different parts of the organization and its service providers.
The role of service providers is also evolving in the new environment. Asset managers are looking for their fund administrators to support more than just processing the trade life cycle, valuation and production of net asset value. They are also expecting the administrator to be a key contributor to their own data management strategy, including the data requirements of their front office, risk management and investor relations.
Evolving best practices: meeting the demands of FATCA and Dodd-Frank
While regulators are eager to see best practices developed and disseminated, it is still too early amidst the ongoing shifts to confidently sanction a single approach. Yet, the wisest course of action for US asset managers is to begin planning now for what investors expect and what regulators are likely to require.
Asset managers should remain flexible and adept enough to effectively respond to continued changes.