Data is at the heart of several new regulatory concerns for asset managers, says industry advocacy group NICSA.
Managing a deluge of data analytics, adapting blockchain technologies, and providing increased data record security and transparency by regulators and investors are all issues firms will face, the group says.
"Whether it's money market reform, report modernization, liquidity risk management or derivatives - whatever the case may be, the underpinning of [new federal rulemaking] is all about data," says NICSA President Jim Fitzpatrick.
Fitzpatrick, joined by NICSA members Craig Hollis, chief compliance officer at Boston Financial Data Systems, and Nick Nichols, vice president of compliance solutions at DST Systems, spoke with Money Management Executive about the industry challenges ahead regarding data.
They also elaborate on the fiduciary rule, noting that firms have shrugged off their reticence toward the rule and are now working to develop BIC solutions.
How important is it for managers to leverage big data to mitigate pressure from new regulations?
Fitzpatrick: There's no doubt that every firm in the industry is looking at big data or data analytics to help them manage their business and look at how they fall in line with a lot of regulations that have either been proposed or are being proposed. It's really going to be a big driver of their success over the long term.
The regulatory costs are going to continue to go up and the industry is going to look to technology and data analytics to streamline those processes in order to refine some of those expense increases that they see, so they are as efficient as possible. Every firm in the industry is focused on those topics and in that area.
Hollis: I certainly agree with Jim. I personally would say that it's critical, and it's the foundation of this regulatory landscape that we have found ourselves in the last two years.
In that time we have seen seven federal rulemakings, three of them have gone final, and I would tell you that the underpinnings - of all of them, whether it's money market reform, report modernization, liquidity risk management, derivatives or whatever the case may be - are all about data, whether it's data for the regulators - the SEC and so forth - or whether it's data in the form of disclosures for the end investor, which of course is very important for the regulators.
Data really equates to transparency, and that's what everybody is trying to get at - in particular, the regulators.
Would you say this is more of an ideological shift towards technology?
Hollis: I would, but what is going to be really interesting about this is the need for data and what data can do in terms of providing transparency. Then you have this internal struggle surrounding privacy and cybersecurity, and non-public personal information. So, everybody wants more data, but how far will that go? Again, you can't mess around with the Gramm-Leach-Bliley Act, which is the federal standard around privacy. It's going to be very interesting to see that arm wrestle and where this thing ends up.
How will the industry's embrace of digital solutions effect operational costs?
Nichols: Well for one, I don't know that these changes are reducing cost with data. Frankly, depending on the kind of data that you're looking at, especially in regards to compliance and understanding whether it's disclosures or adhering to regulation from the SEC or other regulating entities, the pressure is on for companies to make the investment to ensure they understand their data.
The SEC has come out and stated that they're hiring more computer programmers and mathematicians than anywhere else, and they have the ability to now process a billion records every day. They believe they are at the forefront of data analytics and reviewing the data, so companies have to understand what they have, how to manage it and how to know what's working within their data that could be an exposure point for them.
Can you discuss any constraining that firms may be experiencing in regards to the sheer number of new regulations?
Hollis: On the regulatory front, everything that's come down the pipe, at least on the federal side and now more on the state side, is probably looking more at data on the portfolio level; whether it's money market reform, report management, or even in the realm of liquidity risk management proposals. Within that there is something called swing pricing. All of these elements are probably looking for a little more global holistic data around trading activity and patterns.
I will tell you there has been a lot of discussion around swing pricing; "can we use utilize it or can't we?" I will tell you at least within the enterprises, there has been a huge move afoot to understand how we can actually get that data, historical data, and manipulate it in such a way that we can provide value added estimate capabilities.
In the end, I think you will see large amounts of data shared, whether it's at the fund portfolio class level is one thing, and I do think ultimately I think you will see more information sharing around non-public personal information, but it has got to be done in such a way that the asset managers and their distribution partners, the intermediaries and their service providers all have a tri-party agreement regarding the confidentiality of this information and the safeguarding of it.
Nichols: The ideas of consortiums in the market have been met with mixed success. The conversations that I've seen heating up are around the idea of how come we might be able to find a way to share transaction level data so organizations can start to identify fraudulent activities, fraudulent patterns, and individuals that are trying to conduct illicit activity across asset managers, or really across institutions. Today, a lot of what happens is that an individual goes to attempt fraud at asset manager A, and he may or may not get through while attempting the exact same scam with asset manager B and asset manager C. Unless those companies are under the watchful eye of a transfer agent that can notice it, those activities are reviewed in a silo.
Do you see blockchain technology as a possible solution in the future?
Nichols: There are a lot of efforts in the market. One that I am familiar with are ideas about how blockchain could potentially help with fraud, but it's in its infancy. While there are tremendous benefits in having a one truth of a customer, there are offsets and challenges around the idea of the blockchain is supposed to be forever. Then when an individual shows up on the blockchain as a potential risk, and they turn out to not be a risk, how do you get them off the chain? So, there are challenges, but like everything else it's a technology that can't be ignored.
Hollis: I am a little bit skeptical about sharing information and privacy concerns, but until there is a better proof of concept out there - especially in the 40 Act space or the alternatives space - I think it could significantly increase any users' risk profile. I think that's something that firms today are keeping an eye on.
Nichols: Today, especially when you're trying to track fraud, the institutions are always reviewing the same information over and over again for individuals. So, in theory the blockchain could help reduce that by creating one version of the truth for an individual. But to me there are so many pros and cons and things that need to be weighed out.
The DoL is still being contested by different industry organizations regarding its fiduciary rule. What have your firms had to assist with in terms of compliance?
Hollis: I think I would separate it into two different camps. I think first and foremost for asset managers their focus has clearly been on the implications to their product lineup and their distribution footprint and how they're going to handle that. There are some well-documented plans going on the industry like moving from the more expensive front-end loaded type products to the more passively managed, whether it's an index fund or ETF, the utilization of robo advisers and even more recently now, conversations around specific share classes of products for the DoL.
What we've seen in the last 60 or 90 days is the classic Mexican standoff. I think the asset managers are waiting to hear what the distributors are thinking. There was a time, and this goes back to first quarter of this year, where there were a few weeks where the intermediaries were saying that it's too much risk with a BIC or that they're not doing a BIC at all.
Has anything changed?
Hollis: As time has gone on, most intermediaries and broker dealers have understood that's just not realistic. There's too much money there.
There are too many individual investment advisors that rely on that - that's their bread and butter. I think we've seen a shift away from that and I think some of the larger asset managers that we support today have been expecting that. They are also working on developing the complete infrastructure to support a BIC exemption, and what that actually means and how that's going to be coded on the recordkeeping platform.
From my perspective as the CCO, we supporting almost 90 asset managers and almost all are impacted by this rule, so we want to do what we can to help those asset managers, but our focus clearly since the final rule came out on April 6 is we're focusing on the aspects of the DoL rule that impact us as a service provider.
Are there impacts anticipated?
Hollis: Most of the focus has been on our call centers or our client contact center. Are we going to handle inbound calls? How are we going to make sure that we are not providing advice, and what are going to be the compliance oversight tools in place to make sure that we're not giving advice. Then of course there's written communication. So we've gone through an entire exhaustive inventory of every written document that comes out of Boston Financial on behalf of all of our clients to make sure there's nothing in there that can be construed as advice.
We've also identified rough exit numbers, up to 35 or 36. Different types of inbound phone calls or different circumstances where in some way, shape or form, we may be asked or pressured to provide advice. The good news here is that Boston Financial and DST have never given advice. So that's a good place to start.
The other good thing we have going for us, from a client communication perspective, is in the final DoL rule, there was some nice guidance that we're using as our framework.
That rides pretty nicely the parameters that we need to stay within, whether we're dealing with a retailer, direct-to-funds shareholder, or we're dealing with a 401(k) plan participant, fiduciary, beneficiary, or whatever the case may be.
