Last Updated on December 17, 2022 by Anda Malescu
The article addresses the issue of regulatory compliance asset management in the United States. To understand regulatory compliance for the asset management industry, it is important to understand what the industry is about and how compliance functions in the world of asset management.
In the United States, asset management companies take investor capital and put it to work into various investments including stocks, bonds, real estate, private equity, government bonds, treasury securities, municipal bonds, REITs, short-term corporate bonds, and more. The asset management companies make investments in accordance with internal investment procedures and the investor’s profile and risk tolerance. Many of these companies offer their investment services only to high net worth individuals, families and institutional investors.
Aside from investment services, higher-end asset management firms offer additional services to their clients, including legal, tax, estate and financial services. It is standard practice for high net worth individuals and families to work with asset management firms unknown to the general public.
High net worth individuals usually open private accounts with asset management companies
They deposit cash into the account or sometimes with a third-party custodian, and the asset management firm and portfolio managers implement the investment strategy and manage the day to day portfolio trading. Before the 2008 financial crisis, asset management firms were largely unregulated and risk management and compliance were foreign concepts. However, after the crisis, compliance procedures became an integral part of the investment process, and the Department of Labor’s development of the Fiduciary Rule further cemented risk management and compliance into the processes of all advisory practices.
Generally, the asset management industry must comply primarily with the laws and regulations of the United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Today, asset management firms must comply with requirements such as the SEC money market fund rule, enhanced fund reporting, liquidity rule making, the Department of Labor fiduciary rule, new self-regulatory organizations rule and requirements related to Dodd-Frank and other compliance regimes. As a result, in practice, there is an overlap between the requirements of various agencies and the regulatory picture can be rather complex. The asset management sector is regulated by a number of bodies and agencies including:
- United States Securities and Exchange Commission (SEC). The SEC has broad regulatory powers relating to U.S. securities markets, including the oversight of exchanges and the enforcement of regulations. The SEC regulates investment advisers with over $110 million in assets under management. Investment adviser managing below $110 million are required to register with their states, as are the representatives of investment advisers. Further, the SEC provides guidelines for the firms required to register with the SEC.
- Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulating charged with enforcing SEC rules and regulations among its members. FINRA has wide responsibility for overseeing the activities of brokerage firmsand individual brokers.
- The Federal Reserve.
- United States Department of the Treasury.
- Federal Deposit Insurance Corporation (FDIC).
- United States Commodity Futures Trading Commission (CFTC).
- Office of the Comptroller of the Currency.
- Office of Thrift Supervision.
- State regulatory agencies.
Aside, from complying with legal and regulatory requirements, the asset management firms, should follow other regulatory compliance asset management procedures, including:
- Create separate function for compliance manager or team. The asset management firms should create a function specifically for the compliance team or manager that is separate from the investment team. The compliance team should be responsible for designing, overseeing and implementing compliance procedures.
- Third-party verification of client portfolio information. We recommend asset management firms to designate a third party to verify the accuracy of client portfolio information and to maintain it up to date. The third-party verification can be done as annual audit or through trade confirmations.
- Record keeping. We recommend that investment managers retain and preserve records that substantiate their investment activities, their research, the basis for their conclusions and the reasons for the actions taken on behalf of the clients. Maintaining such records can assist with risk management and can alleviate problems and potential liability for the investment manager.
- Disaster planning. Asset management firms should develop procedures to safeguard client interests during a disaster. The plans should include data recovery.
Contact us or schedule a consultation with your business attorney in Miami, Florida USA to help you develop plans for regulatory compliance in the asset management sector and for investment management firms.
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