The Regulatory Road, Part II: The Path Less Traveled

Investment managers often choose between a tactical or strategic approach to regulation. Tactical responders typically handle each new regulation separately, while strategic firms take a more holistic approach to compliance. Firms that choose a strategic response where all reporting is handled by a centralized team or single vendor see increased efficiency, simplified workflows, and a deeper compliance knowledge-base.

With firms seeing so many benefits from a strategic approach to regulation, why have investment managers been unable to unite and adopt a similar approach across the industry? While partnering at an industry level to exploit obvious strategic opportunities would surely benefit investment management firms, there are factors working against this change, including an inability to embrace utilities and the limits of existing working groups.

Similar to how electric companies and water suppliers work to provide standardized and low cost services to a large number of customers, regulatory utility services could introduce efficiencies across the investment management industry. However, there are several barriers working against widespread adoption of regulatory utilities:

  • The utility community is fractured and at times has too narrow a viewpoint to provide a strategic response across a broad range of target regulations. Only with greater engagement of investment managers will we see a consolidation of utilities as commercial pressures take their natural course.
  • The competitive nature of the utility community and competition laws both work to prevent the rise of a single solution. While the vendor community encourages the investment community to act for the greater good, they cannot come together and appoint a common vendor to serve the entire industry without running into business pressures and legal issues.
  • The profile of compliance officers and analysts has risen over the last several years, but there has been a corresponding surge in responsibilities, leaving little time for introspection and long-term planning that could result in a unified embrace of standards to be used across all utilities.

Separately, the investment management industry has done a great job establishing working groups – specific groups set up in the U.S. to coordinate responses to SEC Rule 22e-4 (Liquidity Risk Management), and similar groups established in Europe to coordinate responses to Solvency II, PRIIPs, and various sub-groups for the myriad of MiFID II topics.

This investment in working groups is notable, but at times also notably lightweight. Working groups are staffed mainly by trade-body employees and receive only part-time personnel (and accompanying expertise) from firms. Contributions to working groups are uneven, with some firms happy to look on from the sidelines as other firms devote vast amounts of resources. Driving a strategic approach to regulation across the industry would require a significant increase in trade body resources to support additional full-time employees with bespoke expertise and a new emphasis on responding across multiple regulations.

Today, the industry has moved on from the viewpoint that the response to regulation provides a competitive edge; regulation is simply a cost of doing business. The ultimate client is the investor, who is paying for the same service multiple times and is getting a raw deal. The industry must collectively work in tandem with greater levels of investment in seeking out the types of solutions that move away from the tactical and embrace the strategic opportunity to lower the costs of response, embrace efficiencies, and simplify workflows.


To read Part I of the The Regulatory Road, click here.


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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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