I see a few interesting developments on the horizon with respect to data and the various financial regulation bodies.
I have kept my musings deliberately brief – if anyone is looking for more in depth commentary let me know and I will do a follow-up post on that topic…
In the US there are some updates to the 2(a)-7 rules coming into effect for 40 ACT money market funds to help prevent the 2008 buck-breaking experiences.
The update to the 2(a)-7 rule will require money managers to apply pre- and post-trade compliance rules and to beef-up already stringent reporting requirements.
If you’re interested in learning more about this change the final rule is here (on the SEC site) with a more readable press release here (also on the SEC site), while there is a good summary on this site.
This ruling will create issues for anyone in the post-trade compliance arena, middle-office or marketing operations.
In Canada there is a lot of discussion around the new point of sale fund facts requirements emanating from the CSA, while the regulation has not yet come into effect, there is still a lot of activity and discussion going on- particularly from IFIC who are lobbying for amendments to the proposal.
Ultimately it looks like the changes will be happening, big questions are; exactly when?, and to what extent the proposed ruling will be diluted? – I will update in due course once our ‘Americas’ team report back…
In Europe there are much firmer plans vis-a-vis point of sale documentation with the publication of UCITS IV and the requirement for each manager to deliver a Key Information Document (KID). Much like the Canadian fund facts requirement, KID is effectively a re-working of the UCITS III simplified prospectus requirements, which was deemed by many to be a failure due to local regulations effectively stone-walling true cross-border activity.
Most people I have spoken to in the industry expect UCITS IV and KID to be successful, although there is a fear that operationally some companies are not setup to produce the documents as prescribed.
Meanwhile in the UK, the FSA‘s Retail Distribution Review (RDR) is creating a lot of discussion and CESR are taking note – it is widely expected that a broader European RDR initiative will be coming down the pipeline soon.
Earlier this month CESR published three consultation papers on its technical advice to the European Commission with respect to updating MiFID.
The review includes proposed technical advice by CESR on investor protection and intermediaries (Ref. CESR/10-417), equity markets (Ref. CESR/10-394) and transaction reporting (Ref. CESR/10-292).
Fee reform is also back on the agenda in the US, with Mary Schapiro, Chairman of the SEC, being quoted at a recent event indicating that 12(b)-1 reform was high on the agenda again.
I also noted recently through an article on Ignites that the growing use of collective trust funds has appeared on the SEC radar.
At the moment collective trusts are regulated by the Office of the Comptroller of the Currency or state bank authorities, Ignites indicated that “a top SEC official recently questioned whether their rapid growth in recent years, particularly for retirement assets, may warrant the agency’s oversight.”
Finally, I see Morgan Keegan are coming under a lot of pressure from both the SEC and FINRA. According to Ignites:-
“This month, the SEC formally charged Morgan Keegan with manipulating bond funds’ prices, while a Finra complaint accuses it of using false and misleading sales materials.”
These actions always put a lot of emphasis back on to the management of client facing data – in particular the FINRA complaint stated the following (from press release)
“Specifically, FINRA’s complaint alleges that:
– In its research, investment advice and performance updates to its brokers regarding the Intermediate Fund, Morgan Keegan failed to disclose the material characteristics and risks of investing in the fund, misstated the appropriate use of the fund and otherwise portrayed the fund as a safer investment than it was, even though the firm was aware of material, special risks that made the fund unsuitable for many retail investors.
– Morgan Keegan failed to ensure the accuracy of the advertising materials prepared by the fund manager and distributed by the firm, and failed to ensure that those materials disclosed all material risks, were not misleading and did not contain exaggerated claims.
– Morgan Keegan failed to train its brokers regarding the features, risks and suitability of the fund and, in its communications with its brokers, the firm failed to adequately describe the nature of the holdings and material risks of the Intermediate Fund.
– When Morgan Keegan became aware, beginning in early 2007, of the adverse market effects on the bond funds, the firm failed to timely warn its brokers or revise its advertising materials to reflect the disproportionately adverse effect the market was having on the performance of the securities that comprised the bond funds – which Morgan Keegan brokers continued to sell widely. At this time, the firm reassured, rather than warned, its sales force about the riskiness of the bond funds. As a result, some of the firm’s brokers were unaware of the then-turbulent market’s effects on the funds and failed to disclose the negative effects caused by market forces.”
So where does this leave the data managers amongst us – well, the regulators are starting to flex their muscles – this is a given.
The management of data and in particular the management of client-facing data is on the checklist of all the major market regulators.
In Europe, we are seeing a move away from principles-based regulation towards a more rules-based model as used in the US – this will come as a shock to many of the smaller investment managers who operate in smaller, regional markets.
While the KYC principles re: knowing the customer are still high on the agenda, there is a closing of the loop with respect to focusing on the KYP (Know Your Product) – to ensure financial services companies are treating their clients fairly – this, after all, was the key reason the regulators were created.
How will this manifest itself?
– the regulator is focusing on systems and controls re: presentation of regulatory AND marketing communication documentation / sales material – i.e. sales material is being classified as disclosure of material fact – if the documentation is inaccurate the provider is exposed!
– there is a greater emphasis on being publicly seen to take a strong line with errant companies – i.e. when fines are applied there is significant PR to push this news into the public domain – the governments want the public to be re-assured that the regulators are actively preventing market abuse of the investor. This approach accentuates any reputational damage that can arise from unwanted attention of the regulator
– the regulator is focusing on manual, non-systematic process – this is where most processes fall down and they are well aware of this. When they uncover these processes, it does not take much digging to unearth problems that the company in question may not even have been aware of themselves.
Filed under: Data Quality, Regulation Tagged: 12b-1, 2(a)-7, 40 act, accuracy, asset management, breaking the buck, canada, CESR, client reporting, compliance, CSA, data, Data Quality, fee reform, financial regulation, FINRA, fund facts, fund rules, ific, Ignites, investment companies act 1940, Key Information Document, KID, marketing, Mary Schapiro, middle-office, MiFID, money market, Morgan Keenen, point of sale, RDR, Regulation, regulator, reporting, retail distribution review, SEC, transparency, UCITS, UCITS III, UCITS IV, UK, US
