The Regulatory Road, Part 1: Strategic vs. Tactical

A strategic approach to regulation in the investment industry is frequently championed in financial news articles and blogs. The majority of these missives urge investment firms to reconsider the traditional, tactical approach to compliance that results in a web of vendors and responses to regulatory reporting requirements.

Firms that respond tactically to regulation handle each new reporting requirement separately, rather than as part of a more holistic approach to compliance. These firms typically issue a request for proposal (RFP) to find the best vendor for a specific regulation. The RFP is tightly scoped around the needs of the new requirement, with little attention paid to how it relates to other reporting. This approach leads to the best value response to the directive at hand, but creates greater costs over time because of the inevitable overlap between past, present, and future reporting requirements; our analysis shows the incremental increase in cost associated with a tactical response that individually handles each regulation is as high as 40 percent.

Choosing a tactical response results in investment managers having a vendor for each regulation they are subject to. In a tactical environment, 10+ vendors can be interrogating the same data sources, demanding technical integration resources, and requiring assistance from data analysts. In essence, it’s an inefficient mess of data flows, exception management cycles, and expensive resources tied up in repeated work.

In working with vendors, tactical responders not only incur additional costs, but also absorb extra vendor risk. Tactical vendors tend to focus on a narrow set of regulations and often emphasize technical knowledge over regulatory expertise. Many of these vendors are also new market entrants, often surviving from one venture capital funding round to the next.

By contrast, investment managers who opt for a strategic response to regulation often choose a vendor partner who can create reporting efficiencies and offer broad expertise. The list of vendors with a strong strategic slant is short, but these firms share some common DNA:

  • They acquire and develop compliance and regulatory expertise. Strategic vendors hire regulatory attorneys, former regulators, CFAs, and those with back- to front-office experience to ensure they have the deep regulatory knowledge-base required to swiftly respond to compliance issues.
  • They invest heavily in forward-looking research. Strategic vendors constantly explore how the compliance industry is changing to ensure their solutions are ready for what’s next.
  • They promote data models that can handle multiple reporting requirements from a single source. Strategic vendors identify where reporting requirements overlap so they can leverage a common set of data across multiple outputs.

At CSS, we deliver strategic compliance and regulatory vendor services. We recognize that investing in a strategic response is crucial for the investment firms we service, and we invest heavily in knowledge, technology, and data to ensure our clients can react to the demands they face today, as well as the challenges coming tomorrow.

Tactical Approach
  • A new vendor for each regulation
  • Prepare data sets multiple times to meet each vendor’s requirements
  • Each vendor has knowledge in only one area
  • Work with many smaller vendors, which introduces additional risk
Strategic Approach
  • One vendor handles all regulatory reporting
  • Use a single data set across all reporting requirements
  • Chosen vendor offers broad expertise across the regulatory landscape
  • Partner with a well-established vendor to gain peace of mind and additional security

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CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

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