Book Review: Modern Compliance Volumes I and II

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Modern Compliance: Best Practices for Securities and Finance Volume I; Modern Compliance: Best Practices for Securities and Finance Volume II2015; 2017. David H. LuiJohn H. Walsh, and Jason K. Mitchell.


Modern Compliance is an ambitious undertaking that brings together the myriad complexities of governing the investment professional. Appearing in both volumes, the chapter titled “A History of Compliance” affords the reader a highly detailed yet engaging perspective on the ethical foundations of compliance from its modest beginning in the broker/dealer world. As the complexity of the global economy has risen markedly, compliance has informed best practices across global financial regulation, corporate governance, health care, financial disclosure, and asset management. The process has been codified and institutionalized on a large scale. The discussion is relevant to the investment practitioner because it contextualizes the role of compliance and its continually increasing importance and relevance.

Fiduciary best practices are crucial, as is an understanding of the compliance issues surrounding marketing and distribution — items taken up throughout the set. Beyond foundations, the first volume addresses in depth such core topics as training, custody, privacy, best execution, and cybersecurity, as well as preparedness for firm interaction with the Financial Industry Regulatory Authority (FINRA) and the US SEC.

The Volume 1 chapter titled “Compliance and Risk Management” is a timely and relevant reminder of what happens when compliance falters. Investment management is littered with examples of risk management failures. Multibillion-dollar losses that JP Morgan incurred because of the “London Whale” trade, rogue traders’ disastrous missteps at Barings in 1995 and Société Générale in 2008, the 1998 collapse of Long-Term Capital Management, and the more distant back office failures of certain broker/dealers caught up in the paperwork glut all attest to the need for the proper tone at the top and for individual practitioners to understand the wider importance of their conduct. The CFA Institute Code of Ethics and Standards of Professional Conduct reinforce this necessity. Although there are few explicit statutory provisions requiring broker/dealers and investment advisers to maintain strong risk management practices, regulators will expect these institutions to keep them current.

Volume II devotes several chapters to product compliance, addressing the relationship between the chief compliance officer and mutual fund boards and compliance best practices in the exchange-traded, sub-advisory, and private fund realms. As manager research has evolved to a level of sophistication on par with individual security selection, an understanding of evaluative best practices is essential. Two chapters address due diligence of managers and the vendors they engage. Additionally, a detailed chapter on guidelines for the evaluation of quantitative investment managers acknowledges the growth of this investment approach and takes a close look at how best to evaluate integrity of data, models, and process. Many of the core principles apply, but unique considerations enter the mix, given the complexity of investment models. A brief section parses the US Department of Labor fiduciary rule, providing a useful checklist to help investment practitioners and supervisors determine the extent of their obligation under this meandering piece of regulation.

Connectivity and fintech have upended the traditional hierarchy of control, giving rise to regtech. Practitioners of both compliance and investment management should pay heed. With regulators already using it, big data figures importantly in compliance’s future. Investment practitioners and their supervisors need to understand its implications for their business. Three chapters in Volume II consider these issues more closely.

As the world grows more interconnected, firms choosing to conduct business across borders must satisfy ever more rigorous demands and seek out well-qualified counsel and subject matter experts. One chapter of Volume II provides guidance for US investment advisers doing or considering doing business in the EU. An example of a truly global best practice that marries due diligence and compliance, the Global Investment Performance Standards (GIPS®) continue to evolve. For practitioners in the institutional space, compliance with the GIPS standards affords greater access to clients. Still, the opaque nature of private equity makes its evaluation for GIPS compliance nettlesome. Those who have earned or are earning the Certificate in Investment Performance Measurement (CIPM®) designation, as well as CFA charterholders and candidates, will continue to face challenges.

Modern Compliance draws on the background of experienced compliance officers and attorneys across many subspecialties. The content is rigorous, well organized, and well written. As the contributors affirm, best practices are critical to the success and survival of the investment professional. Indeed, “The Seven Deadly Sins: Common Ways Investment Advisers Violate Their Fiduciary Duty,” the final chapter in the second volume, provides an important, plain-language parting lesson for the practitioner: Critical missteps can permanently impair one’s career.

More book reviews are available on the CFA Institute website or in the CFA Institute Financial Analysts Journal®.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Marc L. Ross, CFA

Marc Ross, CFA, is an experienced investment professional with a varied skill set that encompasses third party manager research and due diligence, securities compliance, investment advisory, and ERISA qualified plan design, sales, and implementation. In addition to the CFA charter, Ross holds the CFP® and CLU designations.



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