Auditing and monitoring are among the Securities and Exchange Commission’s leading compliance directives, according to Anthony Turner, principal at Financial Tracking. Financial Tracking is a compliance software provider.
“How many ‘I don’t knows’ do you have every day in your firms?” Turner said in a webinar. “Do you know if investment advisor accounts are staying within guidelines, either because of trading activity or market risk or market depreciation or maybe a corporate action that could change the facts and circumstances and the characteristics of a portfolio?”
Firms that use manual procedures and spreadsheets to track compliance are at greater risk of regulatory action, Turner said. Large firms that use a sample set of their client accounts to test for compliance may need to break the sample into subgroups, especially if they employ multiple models and strategies for their clients.
“You have a lot of complexity that you’re trying to deal with today,” Turner said, citing uncertainty about regulations, global volatility, difficulty generating alpha and investors shifting toward passive investment management.
Automating compliance processes can help meet some of these challenges by removing manual processes and increasing productivity, Turner said. Compliance technology is cheaper than hiring new staff to deal with increased regulatory requirements, too, he said.
Of course, automated compliance processes can also reduce exam time for firms that are visited by regulators, but Turner noted that it may also help them reduce premiums they pay for commercial liability insurance. “Particularly in today’s environment, that can be significant savings for a firm.”
Regulators themselves are making better use of technology to examine financial services firms. Turner said, “This is not only allowing them to identify, trade by trade, client by client, every day [whether] there’s an outlier or a violation, but it’s also allowing them to increase the number of exams [they conduct] by leveraging technology.”
The Market Information Data Analysis System (MIDAS) allows regulators to identify market manipulations, and Turner said regulators have spent $13 million with Palantir Technologies to use its products to identify insider trading.