The oversight crackdown – a view from the software vendor

Date: January 11, 2013

Much has been made of the recent lessons learned by Directors as 2012 saw financial regulators flex their muscles. Until then it had been so easy right?! 

Today, that approach may not hold up—not when boards are scrutinized from all sides by regulators, shareholders, the media and analysts, to name a few. Getting underneath the hood of the fund’s performance and management is now even more important when tackling governance and oversight within the firm.

We collected some points to guide those with such responsibility when looking for a software solution to improve the way oversight duties are carried out. It’s monitoring of performance and risk that goes further than just checking whether the fund manager is authorized.

Transparency is healthy
What if you can’t actually see what is going in your funds? What if you have no daily up-to-date data? And what happens if one fund owns another fund (fund of funds) as part of its portfolio? Of course you don’t want to give away trade secrets but finding a level of transparency for all is important.

There are tools out there to challenge such issues if suspected. Portfolio analytics provided as software as a service (SaaS) enables not only funds to be analyzed but also funds of funds. An aggregated view allows for a holistic 360 degree view of portfolio performance and risk which previously may not have been possible. That’s quite cool because a fund manager may have one very risky security but the fact that it’s paired up with another security offering different risk characteristics might actually mean it’s a well-constructed portfolio. Breaking it down in such granular detail means the “overseer” can view this.

The reality is that breaking down the fund of funds generates a large level of fee extraction at the consumers’ expense, something that the FSA and other bodies around the world are beginning to focus their attention on. It also means that the Authorised Corporate Director (ACD) does not know what underlying securities are in the portfolio. This is an unhealthy position to be in because if you can’t see through into the fund that sits within the fund you just don’t know what you’re liable for.

Internal conflicts of interest may also need to be unraveled as the ACDs may suffer from a conflict of interest when carrying out their duties. The FSA has recently stated, “In theory the Host ACD appoints and supervises the investment manager, but the commercial reality is that the Host ACD is a service provider to the investment manager (or to the Institute of Financial Accountants (IFA) sponsor). The resulting conflict of interest may inhibit the Host ACD from providing appropriate challenge. Consumers who buy OEICs could suffer detriment if the Host ACD is unable to challenge the investment manager.”
Using independent solutions to measure fund performance and risk allows the ACD, whether housed internally or outsourced, to show an impartial view of where exposures and concerns lie.

Monitor, monitor, monitor
It’s no secret that regulators have come down hard on ACDs and others that have had an over-reliance on traditional offline activities such as desk-based compliance monitoring and a handful of annual visits. The FSA considers oversight such as this inadequate.

Portfolio analytics tools in the cloud can provide always on access to performance. With single logins CXOs, those in governance, investor management, oversight, risk or compliance have access to fund performance online at the touch of a button. Fund managers that manage oversight in house as well as those that outsource these tasks can be looking at the same information and therefore be challenging and monitoring the money manager from all angles to ensure compliance and ensure they have the investors’ best interest at the forefront.

As the FSA (specifically in UK) increase their supervisory focus on ACDs to ensure they meet obligations required, software can enable analysis of conflicting trades where poor performing trades are dumped or parked into other funds to hide poor decision making and reduce investor concern. Stress testing within these analytics tools allows the “overseer” to challenge the performance using “what if scenarios”. What if the trade had happened early in the day? Or what if the trade had allocated new stock in this fund instead of that?” By having a transparent view of performance, risk, contribution and allocation, analysis easily shows if decisions have been made to hide poorer performance.

Use trusted data
When reviewing performance it makes sense to use data from the official book of records. With access to the source data those overseeing, as well as the money manager can have comfort and confidence that this independent source of data is accurate and useful.

Given the debate rolls on it’s clear this will not go away. The FSA continues to hold meetings with UK ACDs, at the time of writing (Dec 2012), asking exactly how they challenge the investment decisions made by fund groups. Indeed the FSA director of enforcement and financial crime Tracey McDermott says: “Those firms which delegate activities to others need to have robust processes to allow them to oversee properly these third parties and protect investors…The FSA takes these situations very seriously and continues to devote considerable resources to securing the right outcome for investors.”

Learn more at our webinar ‘Portfolio oversight from StatPro’on Wednesday 17 April 2013.

To learn more about 13f-2 watch our webinar replay Part 1: Unpacking the SEC's New Disclosure Rules for Shareholders
Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.