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Special Report

Impact investing


Enter the chief compliance officer

To paraphrase the famous Gilbert & Sullivan song: ‘A trustee's lot is not a happy one.' Not only have their roles and responsibilities been amended and made more prescriptive, but they are also likely to face a far greater degree of personal liability for any breaches in a now tightly regulated area.

Trustees face pressure from all sides: increasingly regarded as the whipping boys for eagle-eyed regulators, they also face pressure from their members. They are also accused by the likes of the Financial Reporting Council in the UK of not being sufficiently competent.

There has also been a general shift in the make-up of many funds. Trustees are choosing to diversify asset classes, industry sectors, and, most importantly, geographical coverage. Complex mandates substantially increase the level of engagement for an average trustee who now has to ensure funds are managed in accordance with more than one set of rules. Maintaining a working knowledge of changing global regulations is no light undertaking.

No matter how conscientious or industrious they are, trustees cannot be expected to know the intricacies of every piece of legislation that is applicable to the management of their funds. With a raft of new rules over the last four years, including the ratio d'engagement in France, the Europe-wide MiFID regulations, and the Investment Advisors Act in the US, managing global compliance has become a considerable challenge.


Despite this, there has been a notable increase in the level of engagement by trustees in the wake of tighter legislative controls. However, closing the gap between previous levels of involvement and the current requirement is not something that can be achieved overnight. The challenge for trustees is that a lack of knowledge or claims of ignorance are not a valid defence for mismanagement. Those failing to maintain client mandates face the possibility of actions from investors to recover any losses.

One of the reasons for criticism is that compliance is now a significant consideration in an asset management firm's operational risk calculations. With client mandates and a whole range of local, national and international regulation in place, the role of the trustees has been elevated to one of strategic importance.

The emergence of the chief compliance officer (CCO), is a direct result of the increased focus on regulatory compliance. The CCO provides a conduit between fund managers and trustees. From the trustees' perspective, the CCO makes sure they are kept informed, reassuring investors that the fund is being managed correctly.

The relationship between CCO and trustee is supported by the widespread adoption of new buy-side compliance systems. These tools enable key personnel, including traders, portfolio managers and CCOs, to monitor compliance, both pre- and post-trade, using powerful real-time rule engines that are automatically updated with any new regulations.

In an environment where even a second's delay can have a serious impact on the performance of a particular stock, it is of course not feasible for trustees to approve executions before they happen. However, they do need to be assured that their fund managers are making appropriate decisions.

Detailed time-stamped audit trails for every transaction offer trustees exactly that level of scrutiny, makes analysing portfolio performance and compliance simpler and highlights any ‘rogue' activity.

One of the particular benefits that CCOs offer trustees is reducing the time they take to verify records of the day's trading activity and then return them to the fund manager. In a heightened regulatory environment, the quicker the books are checked and validated, the sooner any breaches can be reversed and positions remedied to give an accurate view of a fund and the associated operational risk. Again, a buy-side compliance tool can speed this process up.

Despite this, there still remain circumstances in which overnight verification and validation are not possible. When this is the case, certain systems also provide CCOs with the ability to post a second official set of ‘as of' positions without affecting current trading positions.

The role of the trustee has certainly become more complex and involved. But the latest compliance tools are delivering appropriate information on the performance and compliance status of the funds they oversee. Additionally, CCOs advise and provide an essential conduit to the fund and portfolio managers. So although the rules and regulations have become more stringent, trustees increasingly have the tools to combat them.

Matt Grinnell is compliance consulting manager at LatentZero

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