2019 Top Compliance Trends for the Buy-Side
Is your firm prepared to take on the challenges that lie ahead?
Every day is different in the financial markets, and asset managers know to expect the unexpected. Even so, it’s almost impossible to overlook key themes that have been running over time. We’ve identified four trends that have been building over the last several years, and we predict will be in the forefront in 2019.
Trend #1: Regulatory pressure is unabating. Last year we noted that buy side firms were already feeling the burden of MiFID II and the Market Abuse Regulation (MAR) in Europe, and that has not changed. But now firms have become more concerned about the U.S. Securities and Exchange Commission’s (SEC’s) National Exam program. The SEC completed over 3,150 examinations in 2018, an increase of 10% over 2017. In its efforts to step up retail investor protection, coverage of investment companies was up 45% over the previous year. Moreover, the regulator is deploying sophisticated data-driven analytics tools to detect market misconduct and assets market-wide risks more quickly. We believe this trend will continue and will become more widespread globally in the coming months.
Trend #2: Compliance is playing a greater role in prospecting. Buy side firms have to worry about insider trading by fund managers or the trading desk, and market abuse in the form of front running, tailgating, spoofing and layering. Other concerns include employees’ personal trading activity, portfolio/investor misrepresentation and conflicts of interest. Clients are aware of these vulnerabilities, and they’ve stepped up their due diligence process as a result. Previously, when asset managers pitched to a large prospect, such as an endowment fund or a retirement fund, the team comprised a portfolio manager, senior analyst, client relationship manager and business analyst/director. Nowadays, the head of compliance is also part of that group. In addition, a trade surveillance and compliance solution may be seen as a competitive differentiator, helping to instill investor confidence and attract new clients
Trend #3: Buy side firms still aren’t fully prepared for regulatory changes and implementations. MiFID II and MAR implementations highlighted weaknesses in firms’ surveillance processes and technology. They’re especially unprepared when it comes to monitoring electronic communications. Better tools exist for monitoring staff through apps, phones and other means, as well as artificial intelligence, machine learning and behavioral analytics. Yet firms are struggling to understand technology capabilities and implement them, comply with reporting and administrative requirements, manage employee conduct risk and mitigate prohibited behavior.
Trend #4: Direct execution has placed greater demands on surveillance teams. Buy side firms are executing more of their order flow directly. That means they’re having to shift their processes to more closely monitor the quality of execution and allocation of transactions to ensure that there are no conflicts of interest. It’s crucial to have processes in place to perform side by side management – the process of evaluating funds/accounts ‘side by side’ for fair and transparent allocations. Firms need tools to measure and track the performance of portfolio managers and ensure that all clients are being treated fairly and equally.
The message is clear for buy side firms. They need to be far more proactive in monitoring activity to ensure that staff aren’t violating any rules and regulations on insider trading or market manipulation. Random sampling, spreadsheets and simple rule-based alerts aren’t going to cut it anymore. They need to automate surveillance processes and empower analysts to prioritize alerts, so when and if the regulators come knocking or clients ask tough questions in the due diligence process, they have the answers they need.
To learn more about how an automated surveillance and compliance solution can help your firm remain compliant for 2019, download our factsheet or visit our website.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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