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.
“Palantir was first used by the Department of Defense to help them identify terrorist networks,” Turner said. “They have since enhanced that product, and the regulators are using it to help them identify insider trading networks.”
The National Exam Analytics Tool, which the SEC started using in 2014, can process 17 million trades in 36 hours and 10 billion rows of data in one day, Turner said. “This used to be impossible by any regulator,” he said. “But what they’re able to do today is, as you know, once you get the exam request, where they’re asking for a lot of information — specifically trades and holdings for every client account number, the investment policy for each client — they’re able to upload this data and really recreate the market actions and the trading actions at the time” a recommendation was carried out.
The SEC is in the middle of a period of uncertainty. Chairwoman Mary Jo White announced on November 15 that she would leave the SEC in January, and replacements have yet to be confirmed for former commissioners Daniel Gallagher and Luis Aguilar.
The agency’s Office of Compliance Inspections and Examinations was “one of the last departments to add an Office of Risk and Strategy to lead exams that are data-driven and transparent,” Turner said. Over time, he said, other SEC departments have “continued to add a dedicated group to do one thing, and that is to lead data-driven exams and transparency.”
In fiscal year 2015, the SEC conducted almost 2,000 exams and identified deficiencies in 77% of them, with 11% being referred to enforcement, Turner said. Mary Jo White noted when she announced her intention to resign that in her time at the agency, it has brought more than 2,850 enforcement actions — about 12 a day — with more than $13.4 billion in judgements and orders, and a 20% increase in exam staff.
“We continue to see a ramp up there. The question becomes what impact will President-elect Trump have on that? Of course, we don’t know,” Turner said.
— Read Despite Threats to DOL Rule, Advisors Urged to Finish Compliance Efforts on ThinkAdvisor.