Speaking at this year’s Global Alternative Investment Management Conference (GAIM), Suzan Rose, chief compliance officer (CCO) at Marshall Wace North America, voiced the key Regulatory pressure facing anyone registered as CCO of an investment fund, even though many are not fully aware of it. Essentially, any CCO who submits false statements or omissions may face criminal prosecution. But how can funds ensure they are achieving the necessary levels of transparency and accuracy required by the regulators, and why is this process not always as straightforward as it seems?
A key reason why this process is not always clear is that many portfolio managers view and understand their business in a different way than how they must report the information to the regulator. For example, if I run an equity portfolio, my key concern will be my net market position. I may have $1 billion in long equities, $900m in short equities and perhaps another $100m in derivatives. I need specific information to help manage my portfolio, my return on investment and my business as a whole. And yet when I come to report this data to the regulators, that same information is of little to no use to them.
Instead of a breakdown of longs, shorts and derivatives, regulators are ultimately only interested in knowing my overall total—my combined exposure of $2 billion. They’d also ask for the breakdown of all underlying exposures by security type, by country, etc. But in turn, these regulatory reporting standards and their requirement for reporting in terms of gross numbers actually means very little to a portfolio manager. Historically, reporting was completed manually in spreadsheets with your fund administrator, either internally or by hiring a lawyer or auditor to help put it together. So when the regulatory data is submitted, it is only the final numbers that are available to view and not the breakdown, what it’s comprised of or any verification of its accuracy.
This of course poses a significant problem for CCOs/CFOs. If they are submitting information to the regulators but they can’t easily trace how these figures were reached, they have no real certainty that the numbers are good, accurate and verifiable. And again, if they are found to be incorrect, the fund and its CCO/CFO may have to face the serious financial, reputational and legal consequences of that failure. In the UK, the US and Europe, respective regulatory bodies now require all investment funds to register their business particulars, which includes having to name their CEO, CFO and CCO. This is still a requirement, even if your firm does not necessarily have this compliance function as a separate role. And with the introduction of new regulations aimed at the detection and prevention of fraud, the risks of a custodial sentence for reporting inaccurate information is now very much a reality.
By employing a solution tailored to help with the full range of reporting requirements, such as that offered by AQMetrics, funds can quickly and easily bridge this information divide. AQMetrics enables the CCO/CFO to drill down into the data so it is no longer just an unverified number on the page. The CCO/CFO can see the reportable, gross numbers and click on each to view the underlying breakdowns by securities, longs, shorts, by country—whichever way they best understand and read their data. Knowing how the reportable data aligns to the various components of their portfolio provides a welcome and invaluable level of comfort and certainty to anyone with legal responsibility for the management of a fund.