SEC Rule Spurs IT Investment

Mutual-fund companies are purchasing new software to make sure they--and their service providers--are in compliance
A new rule from the Securities and Exchange Commission is causing mutual-fund companies and their service providers to scour their trading operations for flaws that could land them in hot water with regulators. The effort is spurring investment in IT systems that can detect and monitor mutual-fund trading operations for potential violations of securities laws.

The new regulation, commonly called the "compliance rule," kicked in Oct. 5 and requires mutual-fund companies to appoint a chief compliance officer and have written policies to prevent abuses of market timing and late trades. Furthermore, companies that contract with a mutual fund have a year and a half to review their own policies. The new rules are affecting IT at both types of companies.

Late trading occurs when investors who place trades after the markets' daily 4 p.m. closing receive the 4 p.m. price of a security. Late traders can use information gained after that time to make buying or selling decisions, to the detriment of other investors. Market timing involves making rapid trades in and out of securities to take advantage of small price disparities in different markets.

State Street Global Advisors, which manages $1.2 trillion in assets, is implementing a compliance system from LatentZero Ltd. called Sentinel, which lets fund managers define rules that govern trades, then automatically checks trades for compliance with those rules. The product, which checks trades against predefined rules, will go live next year.

The SEC rule played a big role in State Street's decision to adopt an automated compliance system, chief compliance officer Peter Ambrosini says. "Although we didn't know what the full extent of the SEC's rule would be, we knew the impact would be large," he says.

The job doesn't end there. Chief compliance officers are required to monitor their own companies' compliance practices and those of service providers such as transfer agents, underwriters, advisers, and administrators.

State Street, for example, uses four advisers, two transfer agents, three distributors, and an administrator. Ambrosini wants assurance that those providers are using the latest compliance technology. "The more automated the service provider's systems are, the more assurance the compliance officer can give to his or her board," he says.

Like the Sarbanes-Oxley Act, the SEC's compliance rule is forging close ties between IT and compliance managers. "The review process itself entails lots of elements of technology," says Tony Evangelista, compliance leader at PricewaterhouseCoopers' investment-management practice.

Companies that provide services to mutual-fund operators have also invested in new systems to ensure compliance. Mutual funds typically hire service providers for help hewing to a variety of regulations.

PFPC uses proprietary technology to provide support, says Neal Andrews, senior VP and head of fund accounting and administration

PFPC uses proprietary technology to provide support, says Neal Andrews, senior VP and head of fund accounting and administration
PFPC Inc., a subsidiary of PNC Financial Services Group, advises its mutual-fund clients about anti-money-laundering policies to ensure compliance with the USA Patriot Act, for example. "A lot of the services we provide are integral to the operations of a mutual fund," says Neal Andrews, senior VP and head of fund accounting and administration. The firm uses its own proprietary technology to provide such support, he adds.

GE Asset Management, which has $171 billion in institutional assets under management, already had IT in place to monitor trading systems for compliance with SEC rules. The compliance rule spurred the company to assemble a project team this year to create tools to measure adherence to the new policies and procedures, chief compliance officer John Robbins says. Electronic systems, he says, "reduce manual process steps and, therefore, the chance for human error."

But the real opportunity provided by the SEC rule, Robbins says, is to "shift from a reactive response mechanism to a proactive compliance culture."

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