Don't let the noise ruin your compliance day

Compliance noise and its impact

Noise can take on many shapes or forms, from the blaring TV from the apartment next door to the incessant tapping of your coworker’s pen on their desk. Big, small, loud or soft, no matter what it is, it’s distracting.

Noise in an automated investment portfolio compliance system is not just distracting but downright wasteful and can pose a financial risk to your firm. It can manifest itself in a number of ways:

• Increased staffing costs
• Delay in breach identification
• Compound financial liability
• Missed breaches

The results produced by your investment compliance system can be cluttered with erroneous alerts or incomplete testing, which require additional staffing time to sift through and decipher. This triage process can extend the time it takes your group to identify ‘true’ compliance breaches and take corrective action. And these days of volatile markets and big price swings can cause a small correction in the morning to be an order of magnitude greater in the afternoon. Erroneous alerts could also indicate your compliance system is not set up correctly and in the worst-case scenario you could miss actual compliance breaches.

But what is causing the noise?

Poor data quality is the prime culprit of ‘noise’ in your compliance testing. This flows along three streams that deserve attention: First is your generic bad data such as having a price with the decimal point in the wrong place or a security’s country of exposure accidentally switched to Bermuda when it really should be the U.S. Then there is the problem of stale data. For example, the security’s price has been the same for two days in a row or the voting rights don’t reflect the recent corporate action. Lastly, you have missing data. Either you had it yesterday and it’s not there today, or the vendor data you need is too expensive so you just ‘make do’ with what you have. Whatever the case, maybe it’s the same old ‘garbage in garbage out’. Whatever the reason, poor data produces ‘noisy’ results from your compliance system.

Suboptimal rule set-up can also produce noise in your results. Your compliance regulations and client guidelines need to be set up as tests in the system. This requires a staff member well trained in the system functioning and the data structure used to translate the external vendor data into the formal data understood by your compliance system. This person must be strong technically, as well as have good business and/or paralegal skills. It’s somewhat of an odd combination and this why your testing rules may have the tendency produce false positives. Or worse, they fail to identify possible breach situations.

Lack of automation and testing logic

A third factor that can contribute to noisy results is not having the right automated investment compliance software system to precisely codify your requirements into accurate testing logic. This may be due to the lack of a robust automated compliance system, or the failure to upgrade to the latest version of the product to take advantage of the newest functionality. In fairness, this one is really a cost-benefit (or cost-risk) decision for a firm…caveat emptor. Many companies will tend to ‘make-do’ with the process they have until there is a break which highlights the weakness to senior management. At that point, the damage is not just financial but often reputational as well. In this instance the compliance noise can be heard across the organization, which is never a good sign.

So, if you think you have compliance noise or don’t know the answer to the question…ask. Just make sure your seat belt is fastened and you’re in the upright position because it may be a bumpy ride.

About the author, Matt Grinnell

Matt Grinnell is global product manager for Linedata software solutions, including fund oversight and compliance. A seasoned industry veteran, Matt’s focus is driving vision and strategy, working closely with clients and industry participants to discover and develop initiatives that grow customer value. Before joining Linedata, Matt worked at Fidessa for over a decade, where he was responsible for global product management and marketing of investment compliance and regulatory controls solutions. Prior to that he held compliance leadership roles at Putnam Investments and Fidelity and specialized in assessing the impact of new regulations and evaluating industry trends in risk and compliance.