CRM II: Finding a Flexible Solution in the Compliance Era

Transcription

1 whitepaper CRM II: Finding a Flexible Solution in the Compliance Era The global attitude toward investment and wealth management has become cautious since the financial crisis of In an effort to revitalize investors confidence, trust, and comfort in investment firms, regulators have introduced compliance legislation which requires investment managers to change the way they interact with their clients. The Foreign Account Tax Compliance Act (FATCA, 2010), Dodd-Frank Act (2010), and the Directive on Alternative Investment Fund Managers (AIFMD, 2009) are just a fraction of the North American, European, and transnational legislation that bind and shape industry practices. Investment and wealth management firms must adopt flexible and accommodative practices to respond to the constant influences on their workflow. Future changes to legislation will continue to impact investment operations; how can asset managers, advisors, and brokerdealers successfully adopt flexible business processes to efficiently accommodate evolving regulatory requirements?

2 For investment firms in Canada, this is an urgent priority. The second phase of the Client Relationship Model (CRM II) will be rolling out new compliance demands over the next few years, challenging firms to keep pace with changing requirements. Now is the time to rethink your strategy towards compliance as an opportunity for operational enhancement. Finding a flexible technology solution is key to ensuring CRM II compliance and accommodating future requirements. The Enhanced Client Relationship: CRM II The second phase of the Client Relationship Model (CRM II) has begun to influence the practices of investment firms in Canada since its enforcement by the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Securities Administrators (CSA) in It aims to provide investors with comprehensive information about the costs and performance of their accounts by requiring the disclosure of detailed information on fees and compensation. These requirements include: detailed cost information for each security, enhanced performance reports, and annual disclosure of all account fees and charges, to include fees related to opening the account, direct and indirect charges associated with the purchase or sale of each security, and a summary of all charges and compensation received by the dealer firm. Securities dealers and managers must transform their reporting and information practices to meet these strict disclosure requirements. CRM II requirements will take effect over the next three years July 15th of 2014, 2015, and 2016 requiring firms to take a proactive approach to compliance. A general understanding of the information and the timeframe of disclosure and reporting is given by the illustration below: Specific pre-trade disclosure of charges Additions to trade confirmation disclosure Annual yield at purchase Compensation from transactions Benchmarking data and summary Enhanced account statements Market value Redemption charges (DSC) Investor protection fund Security control party and description Quarterly position cost information as book or original cost Trade confirmation and charge disclosure Annual fee charge and compensation summary Enhanced annual performance report Market value of all transactions Annualized returns CRM II: Finding a Flexible Solution in the Compliance Era 2

3 A potential division between what firms and regulators consider best for investors may slow down compliance with legislation. CRM II promotes a then and now approach to viewing performance, requiring firms to report on dollar-weighted rates of return. This creates additional challenges as many firms typically prefer the standard time-weighted return to report performance to investors. This requirement has also created a differentiator between Canadian and US reporting practice which introduces practical conflict when servicing international clients. As CRM II mandates investment dealers and managers to provide their clients with an assortment of detailed, frequent, and often onerous report and disclosure information, the legislation is placing a significant, new demand on firms to operate flexibly. Looking forward, the Third Basel Accord (Basel III) to be instituted before the end of the decade, non-us fund reporting requirements under FATCA due in 2015, and various other regulations further reinforce the needs for operations to become more flexible, scalable and transparent to accommodate evolving requirements. Investment and wealth management firms should future-proof operations with scalable technology rather than meet tactical requirements in response to each piece of legislation. These firms can comply with CRM II by augmenting standard practices rather than reinventing processes, such as analysing performance with their preferred time-weighted methods alongside the required dollar-weighted method. As a result, the compliance-ready solution that accommodates CRM II will enable operations to be flexible, providing protection against additional compliance requirements to come, without requiring firms to reshape their investment strategy. Best Practices for Compliance and Operations To ensure a firm is braced to meet compliance challenges, their vendors should be able to provide guidance on operational questions, such as what does it mean to be CRM II compliant and how can I use this opportunity to enhance my operations? While it has unique requirements, there are a number of best practices to follow when optimizing operations to comply with CRM II that apply for any legislation. First, in order to address client needs and the reporting requirements of CRM II, the development of a solution must be proactive. This means that firms should strive for compliance before legislation is implemented to provide confidence that operations are prepared in time to address any last minute changes required. For instance, to be CRM II compliant is to understand legal obligation not only in 2014, but for 2015 and 2016 as the more substantial cost disclosure, performance reporting, account statement, and reporting requirements are due to come years down the road. Working with a technology partner that has a proactive strategy and anticipates future requirements ensures you can meet your unique operational challenges and effectively address compliance requirements as part of a controlled and measured process. CRM II: Finding a Flexible Solution in the Compliance Era 3

4 Second, any solution designed to meet compliance requirements should be flexible enough to meet future, unanticipated changes and assist with operational efficiency. In the case of CRM II, cost disclosure, account statements, and performance reporting obligations include specific reporting requirements that change from year to year. In conjunction with proactivity, an effective solution must provide its users with the ability to assimilate all information into reports and produce reporting at any frequency necessary to be considered compliant while maintaining continuity and efficiency. It is critically important to integrate systems and interfaces in order to produce sophisticated visual data, to meet CRM II requirements and beyond. A flexible solution enables firms to view their positions holistically and adapt to unplanned challenges with ease. While CRM II is driving investment managers to improve compliance programs, a solution provider should also understand current practices, foresee future changes, design and solve for the impacts, and provide gradual but timely solutions to improve operations more broadly as a best practice. Solutions for Success In order to deliver a proactive and flexible strategy towards compliance, technology vendors need to provide a holistic solution to address these challenges. An effective system should include: Reporting templates containing interactive input fields that offer reporting column selection and CRM-consistent items. This will address obligations to contain exact information in; Relationship disclosure information (type of client account, available products, type of risks, conflicts of interests, etc.) Pre-trade disclosure of charges (charges, deferred sales charges, trailing commissions, etc.) Trade confirmation Account statements Compensation reporting Flexible reporting interface that allows for addition or subtraction of items entered in a report or custom report creation, enabling firms to accommodate the several phases of CRM II requirements. Automatic reporting and integration of reporting to external mailing/delivery systems. This will allow users to meet reporting frequency requirements across the report library. Task interface that alerts and reminds users of CRM II-specific tasks, configured initially to ensure that all tasks are organized and timely. This may use a calendar interface to display client needs in respect to individual pieces of legislation, and may include workflow organization and checklists that ensure completion of time-sensitive compliance tasks. Monitoring technology with the ability of notifying operations on breaches of CRM II requirements. CRM II: Finding a Flexible Solution in the Compliance Era 4

5 Internal calculator of CRM II-specific values, including market value and excess capital. Emphasis on a visually organized display of information relating to regulations and their impact on clients and their accounts. Flexibility and user ability to override any compliance-purposed activity to enforce optional vs. mandatory compliance requirements The methods presented here describe best practices for how proactive solutions providers can help investment firms to meet compliance requirements and optimize operations in the process. SS&C solutions provide investment firms with flexible solutions, on a deployed, hosted and outsourced basis, that are easily customized to meet each client s unique operational requirements and address the complex regulatory requirements faced globally. Sample performance report aligned with CRM II produced by SS&C Investment Performance Report for the Year Ending Portfolio International Master Address: 80 Lamberton Account 1 Windsor, CT This report tells you how your account has performed since it was opened on 1/1/2005. It is intended to assist you in evaluating your progress towards your investment goals. As always, we encourage you to discuss your objectives and concerns with your advisor, who can assist you in making decisions regarding your investments. Please refer to the second page for an explanation of these values. Your investments have increased by $16,822, since you opened the account Your investments have increased by $6,640, during the year 2013 Invested since $ 11,215, Market Value on $ 28,037, ,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Invested since Market Value on The table below shows your personal rate of return for various periods ending Returns are calculated after fees have been deducted. See the next page for more information about these returns. Time Period Your Account Performance Year Ending Past 3 Years Past 5 Years Past 10 Years - Since Inception This table shows the activity in your account since it was opened, and in the last year. The contribution and withdrawal values reflect amounts you have deposited or withdrawn from the account, either as cash or as securities. Since Inception Year to Date Starting Market Value ,985, Contribution 11,215, ,411, Withdrawal Change in Market Value 16,822, ,640, Current Market Value 28,037, ,037, Lamberton Road SS&C Windsor, Technologies CT USA 47 Farnsworth Street Boston, MA USA t: t: [email protected] f: [email protected] 2014 SS&C Technologies Holdings, Inc. PORTIA is a trademark of SS&C Technologies Holdings, Inc SS&C Technologies Holdings, Inc.