Top 6 Pitfalls of Implementation

Every year, the rescue workers of the White Mountains have to fetch hikers who started out their climb on a bright and sunny day in their shorts and tee shirts, with minimal supplies and little or no experience with the terrain. It was happening so often, that the New Hampshire Fish & Game Agency launched the “hikeSafe” program that has checklists for required gear, discussions of weather, technology recommendations, etc. Hikers who ignore the recommendations may find themselves with a bill from the Agency, for the tens of thousands of dollars expended during the search and rescue.

Technology professionals, under pressure to deliver on project deliverables, often bypass the tedium of inventorying the current state of systems, interfaces and data quality in favor of getting an immediate start on the project. They spend little time questioning the end users on the current terrain–which can be rife with disagreements about the goals of the project and competing needs–and fail to account for the changeable “weather” of regulatory requirements. Advocating for the time and budget to do a thorough current state analysis can be tough, but skipping it can often leave a project in need of an expensive rescue.

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Exchange Traded Portfolios (ETPs) Part 3: A Band of Gold

In Parts 1 and 2 of this series, we discussed exchange traded portfolios (ETPs), namely funds (ETFs) and notes (ETNs) in terms of their structural and operational characteristics. In this concluding article, we’ll look at practical considerations facing investment compliance professionals using the example of exposure to gold.

Why gold? The majority of institutional investment managers who might utilize a gold ETP would not be focused on commodity investment. It’s much more likely that an equity or debt focused fund manager might use a gold ETP to create exposure to an alternative investment class without the expense of constructing a vault in the break room. Because of this, and the way in which data providers classify ETPs at a high-level, a gold ETP is more likely to trip up a well-intentioned investment compliance program.

As an example of what can go wrong, consider SSGA’s GLD ETF, which holds only physical gold bullion. IMP witnessed a fund with a prohibition against precious metals miss a purchase of GLD. The reason? The pre-trade compliance system considered GLD to be an equity. It trades on an equity exchange, it has an equity security type from data providers and it was set up as an equity by a data management team unfamiliar with the nature of exchange traded portfolios. It’s not hard to imagine.

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Exchange Traded Portfolios (ETPs) Part 2: Structural differences among ETPs

In part one of this article, we reviewed Exchange Traded Portfolios (ETPs) and defined them as including Exchange Traded Funds (ETFs) and Notes (ETNs). They trade like common stock but create mutual fund-like exposures. Part 2 will examine the different structures under which ETFs are created, and the key distinction of ETNs.

There are several major structures used in the creation of an ETP, and new ones are on the horizon. We’ll focus on those aspects which may be relevant to compliance.

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Exchange Traded Portfolios (ETPs): Definition, Creation and Redemption

Saturday Night Live’s 1976 commercial spoof attempted to categorize a product called New Shimmer. Gilda Radner proclaimed “It’s a floor wax”, while Dan Aykroyd enjoyed it on his pudding with the retort “It’s a dessert topping”. It was durable, scuff resistant and delicious!

Not quite so readily resolved is the classification of Exchange Traded Portfolios (ETPs). Broadly speaking, ETPs include Exchange Traded Funds (ETFs) and Notes (ETNs). Mechanically, they trade like common stock but create mutual fund-like exposures.

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Trade Compliance from a Portfolio Manager’s Perspective PART 2: Seven Suggestions to Improve Your Work Culture and Relieve Tension

Two weeks ago I illustrated the often-strained relationship between Portfolio Managers (PMs) and the compliance team. PMs complain that the compliance team is slowing them down, whereas compliance professionals push back when PMs demand that compliance ‘fix it’. To combat tension, periodic communication between the PMs and compliance is needed. Understanding the PMs viewpoint on the current state of pre-trade compliance and mutual education as needed will facilitate a better working relationship.

In this article, I will offer some practical pointers to help improve and maintain the relationship between PMs and compliance. IMP Consulting’s experience working with multiple clients shows that a little proactivity from the compliance side calms things down, and allows an environment of trust to develop between the PM and compliance teams. Please note an underlying assumption is that the PMs have undergone proper system training. If this is not true, then training the PMs so they can properly understand and work with compliance alerts is critical and must be done first. Here are seven ways Compliance can foster a better working environment with PMs:

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Trade Compliance from a Portfolio Manager’s Perspective

An interesting dynamic exists between the Compliance team and Portfolio Managers at many investment management firms. Portfolio Managers complain that the Compliance team is slowing them down, whereas Compliance professionals fret when Portfolio Managers demand that Compliance ‘fix it’. With few exceptions, there is tension between Portfolio Managers and Compliance. 

But why exactly does this tension exist? Of course there is a balancing act between efficiency and compliance, but there is more to it. To understand better, let’s first go over how orders are created, and importantly what the Portfolio Manager’s perspective is.

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How to Safeguard Your Firm’s Culture – Building Behaviors that Support Compliance Best Practices

At a recent Risk Management Association (“RMA”) seminar, the topic of firm culture took center stage. Interestingly, the esteemed panel comprised of regulators from the SEC, FINRA and the Federal Reserve Bank all agreed that culture, or more specifically, conduct and behavior, is a major influence on compliance practices.

FINRA defines firm culture as “a set of explicit and implicit norms, practices and expected behaviors” that affects how a firm makes and implements decisions relating to the firm’s business. In 2016, FINRA will assess how firms develop, communicate and evaluate employee fit within their culture using some defined indicators outlined in their priorities letter.

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The “Plain English” Myth of Coding a Compliance Rule Library

Compliance Rule “Coding:” What does it really mean to “code” a compliance rule?  If you have a home-grown system, it may mean that it is written in a SQL-like fashion, and some programming skills are necessary.  If you have a commercial system, however, “coding” the rules is a bit of a misnomer. It is shorthand for the tasks involved in turning the “plain English” legal definitions in a prospectus, SAI, client agreement, indenture, or regulation, into a logical statement that can be processed by your compliance system. Most of the market-leading systems have a “plain English” interface that facilitates rule coding by non-programmers.

Why, then, is rule coding so challenging?

The issue is that the commercial interfaces, while helpful, do not alleviate the necessity of crafting precise, logical statements.  In fact, most of the logical thinking about how to translate a compliance mandate should take place before the rules are written. 

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Top 5 Compliance Trends of 2016

Welcome to 2016. While resolutions are still fresh, IMP wanted to share five trends and regulatory changes to keep in mind in the new year. Our compliance experts monitor updates to SEC regulations and other compliance news in order to keep up to speed with regulatory pain points that our clients are facing, and help develop solutions to assist them. (Our blog also contains posts on the following topics).

Our top five for 2016:

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The Third Avenue Fund: A follow up

On December 15, we blogged about the struggles that some high yield funds were having trouble with honoring redemption requests. One of them, the Third Avenue Focused Credit Fund, in lieu of cash,  had taken steps to provide its shareholders with interests in a trust that would be used to liquidate the fund’s assets once it had been closed down. Since that time, the Fund has come to an agreement with the SEC, permitting it to postpone honoring redemption requests until it can liquidate the fund’s assets in orderly fashion. 

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The Best of IMP’s Blog in 2015

If you’ve been following IMP’s blog over the last year, you’ve seen our team of experts leverage their hands-on industry experience to share information and insight on relevant topics ranging from compliance to implementation to “managing” managed service providers. 

We’ve taken a look at the ten most popular blog posts of 2015 and provided our subscribers with the list below in case you missed one or you would like to read it one more time. If you’re new to IMP’s blog and wish to subscribe for 2016 please click to subscribe.

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QUICK READ: Junk Bond Funds & Proposed SEC Regulations

Last week, the U.S. asset management community saw first-hand examples of why the SEC proposed regulations this past September which are meant to prevent a shareholder run on mutual funds during a future financial crisis. 

Two junk bond funds, one a ’40 Act open-end fund, and the other, a hedge fund, announced that they would stop honoring redemption requests in cash, and would soon close. Notably, the ’40 Act fund (the Third Avenue Focused Credit Fund) announced that in lieu of cash, it would provide redemptions to shareholders in the form of ownership interests in a trust that will be used to liquidate the fund in the coming weeks. Normally, SEC permission would be required in order for a fund to stop paying redemptions, however offering the trust ownership interests appears to have acted as a means to avoid this process. 

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An Update to the 2016 Compliance Date Rule 2a7 Revisions

In 2014, the SEC announced the first significant changes to Rule 2a-7 since the comprehensive post-financial crisis revisions announced in 2010 (see our blog post from earlier this year, entitled “Preparing for the 2016 Rule 2a7 Requirements”). At that time, the SEC also announced that they were “re-proposing” the elimination of credit rating requirements, a change that would be in line with section 939A of the Dodd-Frank Act. This section called for amending rules that pertain to the reliance on ratings from credit rating agencies. Just this past September, the Commission announced that the removal of the language in Rule 2a-7 pertaining to the relied upon NRSRO* credit ratings would have a compliance date of October 14, 2016. This means the revision takes effect the same time as the majority of the changes that were announced in 2014. 

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Advice From the Other Side of Implementation

Unfortunately, despite the best intentions at the starting line, not every outsourcing project crosses the finish line as a success.  IMP and TSAM asked survey respondents what they would do differently if they could do it over again.  Not surprisingly, most responses had one key theme in common:  firms would conduct a more thorough requirements analysis of their own needs; in conjunction with conducting a more in-depth validation of the vendor’s capabilities, including the vendor’s resources and qualifications.

Most notably, 50% of respondents said that they would conduct a Proof-of-Concept (POC) before signing the contract.

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Shareholder Disclosure – Schedule 13D and 13G

As firms expand into new markets, the task of monitoring shareholder filing requirements has become increasingly demanding.

Investment managers and funds that have discretion over or beneficially own more than certain amounts of US equity securities registered under the US Securities Exchange Act of 1934 may have to report these holdings to the SEC.  All markets around the globe agree that shareholder disclosure requirements are good for the industry.  The problem is that each jurisdiction operates independently. Therefore this has led to an unlimited number of ways the requirements have been implemented.  Keeping up with the various regulations in different countries is challenging and onerous.  Timing of the filings may differ along with the thresholds. 

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Compliance Software: Five Keys in Buy vs. Build

If your firm is evaluating a build vs. buy decision regarding compliance software, you may find yourself facing many of the same decisions that you’d face when deciding on whether or not to buy or build a new home.  Here are five keys things to consider when making that decision.

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Compliance at a Glance: Rule Setup Errors

At IMP, we see every day examples of how uncontrolled library growth, inadequate scrutiny and inconsistent interpretations of client guidelines can cause errors and missed violations that risk monetary and reputational loss for CCOs and compliance teams. 

Without a rigorous, annual testing of the automated compliance rule library and supporting data, the results portfolio managers and compliance teams rely upon are statistically likely to harbor error rates of 25% or more. In fact, we find that between 25% and 40% of the coding backing these systems is, on average, incorrect - a fact that shocks compliance teams.

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You’re Not Alone, Help is on The Way: Tips to deconstruct NFA questions and get it right, THE FIRST TIME

In our previous blog post, An Intro to NFA Reporting: How prepared are you?, we discussed the background of the National Futures Association (NFA), the association’s relatively new reporting requirements, and suggestions on smoothing out the filing process. Since thousands of pools require individual reporting, the requirements for your firm may have increased exponentially.  Most firms don’t realize the detail required in the filings and this level of detail doesn’t always come at the push of a button in existing reporting or trading systems. 

Hopefully, this blog will provide you with some helpful insight/methodologies on where to get more information, how to deconstruct the NFA questions, building a data dictionary and benefits of documentation. 

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An Intro to NFA Reporting: How prepared are you?

Reporting requirements for the National Futures Association (NFA) have only been in effect for two years and are mandatory for firms trading futures, forex, or OTC derivatives. It has taken the full two years to answer some of the questions complying firms have. The NFA has provided some guidance on their terminology and definitions but there is a long way to go. In this blog, we provide:

  • Background on the NFA
  • Key topics on NFA reporting requirements
  • Lessons Learned:  Three issues and suggestions for a smoother filing process

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Preparing for The 2016 Rule 2a7 Requirements

Over its life span of more than 30 years, Rule 2a-7 has gone through no fewer than 5 updates. In 2010 we saw the most drastic changes to the rule since 1997 as a result of the Reserve Fund’s “breaking of the buck” in 2008 (due to the Lehman Brothers default). In July 2014, after several years of debate and discussion, the most recent changes to the rule, which will come into effect in October 2016, were announced.

The new rule will have greatest impact on Institutional Prime money market funds: however, government, and municipal money market funds (MMF) will also need to make specific changes in how they operate. All MMF will need to decide whether and how to utilize new tools provided to them by the law in order to prevent future runs on their assets by shareholders.

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