With a number of new Securities and Exchange Commission regulations either recently implemented or looming on the horizon, an enormous administrative burden has been placed on the mutual fund industry.
As a result, a number of the industry's leading service providers have rolled out new business units specifically designed to help funds and their trading partners meet those new requirements. One such player is JPMorgan Worldwide Security Services of New York. Its JPMorgan Compliance Solutions unit supports the needs of chief compliance officers and registered investment advisors in delivering coordinated services, and provides the infrastructure and documentation needed to assist clients in documenting that fund policies and procedures are designed to prevent violation of federal securities laws.
Most recently, the group added a Web site function - one for the public and one for clients only - that contains compliance-related information and resources designed to support CCOs in meeting their responsibilities. The public page includes an overview of the JPMorgan Compliance Solutions program and offers information about the compliance-related products and services JPMorgan provides its clients.
The client-only page is an extranet site that allows CCOs and their teams to access relevant information and tools 24 hours a day, seven days a week. Resources include materials that would help them meet their obligations under SEC Rules 38a-1 and 206(4)-7.
Money Management Executive Associate Editor James M Amend recently spoke with Virginia Meany, head of global fund administrative services at JPMorgan Worldwide Security Services, about the firm's compliance services program, what it's like operating a new business unit in a regulatory environment that's still evolving and where the industry stands in meeting the obligations of the new regulations.
MME: What's the genesis behind the JPMorgan Compliance Solutions program?
Meany: You know, we deal with seven out of the top 10 asset managers in the business, and I think that creates a need for us to be leaders on industry issues. In the period we are going through right now, where there have been substantial regulatory changes, we've had an opportunity to do what we do best and that's to showcase the talent and the technology that we have. Our program has been around for almost a year now and we've had a number of different iterations, so we continue to expand and enhance the program.
MME: Could you bring us up to speed on those enhancements?
Meany: Initially, we coordinated all the different facets of our program to ensure that all of our particular product disciplines are represented in gathering policies and procedures - that's a big first deliverable of the new requirements, that CCOs are able to confirm to their boards that their internal and external service providers have a well-developed set of compliance policies and procedures.
We've taken it to the next step and summarized the policies and procedures and related them to the regulation. All of this is housed on our Web site for CCOs, at www.jpmorgan.com.
That's one part of our services. Another is consulting. We have conducted client visits, shared metrics and coordinated periodic conference calls on current topics. We provide a comprehensive series of operational performance metrics, measuring service delivery against industry benchmarks and SLAs [service level agreements].
We've also been spending a lot of time developing the Web site, because we recognize that many of us work a lot of different hours, and our clients can be at any point on the globe and need to connect with us.
MME: What elements of the Web site do your clients find particularly helpful?
Meany: The news and information allows our clients to be up to date with what we're doing, what's going on in the industry and what the regulators are doing. Being current is always valuable. Not only do we publish the policies and procedures, but also the matrix and the summaries, and we're able to tie them into specific regulations to provide a valuable analysis of the regulations.
MME: There's PDF of a typical SAS 70 report, which is the audit report for services providers, at the site. How does viewing that static document help your clients?
Meany: We provide our clients the opportunity to access the SAS 70 vis-a-vis our Web site at any time because we all know we work around the clock. Perhaps they're planning a site visit or planning a periodic update to the board or developing a system of metrics. Having access to that at any time is important. And, of course, we augment that with access to our industry experts, so we're providing information and consultative support.
MME: You mentioned that JPMorgan conducts site visits. Does that in any way prepare firms for the day when the SEC might arrive to conduct its review?
Meany: It helps our clients understand what a comprehensive review of activities is, so in that sense it might be a barometer or a benchmark, but it really is to inform our clients about our control environment. That's really the intent: a comprehensive walk-through of our control environment and our technical environment. It's more like kicking the tires and to have a very interactive relationship with us about the work they pay us to perform.
MME: What sorts of resources are devoted to the JPMorgan Compliance Solutions program?
Meany: I wouldn't give you a specific head count, but we're in the product delivery business, so our teams that deliver the products would be engaged and our senior managers, in addition to our CCO program manager. We recognize that from our client's standpoint, there is an administrative burden in being able to document and affirm to the board that they have a good view of what's going on in their service provider organization. It is very much an extension of what we do, and we make sure that it is thorough, comprehensive and well-documented enough that it would meet the standards that a CEO would require.
MME: You mentioned that among your clients are seven of the top 10 asset managers in the business. Does this mean your group is more adept at handling compliance solutions for big fund complexes, rather than smaller firms or boutique shops?
Meany: We're a huge, global organization, and we deal with large firms, and we deal with small firms. There's a very broad range of products and services we provide our clients. Many of our clients are global clients and have an interest in not only how regulations are evolving in the U.S., but also Europe or Asia. So the fact that our client base is global and our network is global, it creates very integrated discussions about changes around the globe as they pertain to the financial services industry.
MME: Even some of the most seasoned industry professionals are expressing a measure of frustration in trying to navigate the intricacies of the new regulations, such as how much detail should be included in the CCO report that is due before fund boards by April 2006. What makes JPMorgan Worldwide Security Services such an expert on compliance issues when most of us are still reading the fine print?
Meany: We're always careful to stay very close to any of the guidance that is coming out of the regulators, as well as the industry itself, and then there are our particular industry contacts, the discussions we have with industry organizations, and the discussions we have with our clients, which are very sophisticated and complicated. We combine that with the JPMorgan muscle and expertise. We have our own players that are very engaged in the industry at panels, participating in Investment Company Institute committees, as well as staying very much in tune with the regulators. So we continue to enhance and evolve our thinking, but we think we have a very strong foundation, not only in our organization and our team but also in our ability to work very closely with all the players in the industry.
MME: Was there any trepidation in building out a new business unit in an environment where the rulebook is still evolving?
Meany: No trepidation, but I think there's a strong understanding that there is still a lot of wood to chop. What is the best practice around an [SEC] site visit? What exactly does the CCO need to include in their reports to the boards? How do they best prepare for that presentation?
So there is a great need to continue discussions in a very interactive way.
MME: From your perspective, how is the industry as a whole dealing with the fact that, as you say, there's still a lot of wood to chop?
Meany: I think 2005 is a period where we all came to understand what the new regulations are, and now I think we're in the how mode.' As an example, the hot-button issue in the marketplace is the requirement for CCOs to report to their boards that their service providers, internal and external, are in compliance with the regulations. I think there is a lot of discussion among the CCOs, as well as service providers and fund management groups, as to what that report should consist of, what are the best practices, how does one prepare for that, and I don't think there is any formal roadmap that says, "This is how you do it."
So, this is still a period of thought and discussion, as we as an industry sort through what the requirements might be and how to best present those requirements.
But the deadline for that is looming in April of 2006, so there's certainly a maturing of the discussion. For example, there's great interest in the third-party reviews that could augment the scope of work that the SAS 70 [audit] reviews have traditionally covered. Several areas need to be covered by these additional, third-party reviews. We would think it would go into some of the financial reporting areas - the tax area and disaster recovery, for example.
MME: The CCO reports to fund boards are, indeed, top of mind among most industry executives right now, but are there other regulatory issues your clients are particularly concerned about?
Meany: The SEC has certainly identified areas of great interest around trading practices and hot money and things like that.
But I also think we're seeing continued growth in mutual funds. Our clients continue to grow their businesses, and we see a lot of new fund launch activity. So, I think the industry is moving in two areas: making sure the compliance and control environment is bulletproof and at the same time there's a healthy interest in taking advantage of new growth opportunities.
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