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Compliance Technology Concerns Are Front and Center

No, a "high-tech compliance system" is not an oxymoron. In fact, just about every mutual fund company is grappling with ways to leverage technology to increase the speed and efficiencies of mundane but vital compliance tasks, while keeping their eyes trained on the bottom line and trying to rein in costs.

That's the focus of a panel scheduled to speak at the 2003 Mutual Funds and Investment Management Conference in Palm Desert, Calif., this week. The Investment Company Institute and the Federal Bar Association are co-sponsoring the event.

"Technology is changing, and compliance is changing," said Merele A. May, vice president, fund accounting systems at American Century Investments of Kansas City, Mo. Investment companies are facing great challenges, including adherence to the new provisions under the Sarbanes-Oxley Act and subsequent SEC regulations, he noted.

Consequently, company executives are looking at new technologies attentively, especially data - what some fund companies consider a four-letter word. "No matter what your systems, needs and requirements, it's still all about managing data," May said.

Pre-Trade Compliance

In order for technology to evolve to solve compliance needs, there has to be a philosophical change in how compliance systems are perceived within the asset management industry, said Paul Kirwan, partner with Deloitte & Touche in Boston.

In the past, no one saw a great need to invest in additional capabilities such as pre-trade compliance systems, he said. Now, many firms are realizing that manual tasks no longer suit their needs and that they have to automate.

Such pre-trade functionality can, for example, allow a manager to see in advance of actually sending a trade through to the trade desk if a particular securities purchase will push a fund's sector concentration over the prescribed limit. Having that look-ahead capability can save fund companies real money if a $20,000 error can be prevented, Kirwan noted. In addition, many institutional investors, who have become fussier in light of the difficult market environment, are now requiring investment management firms to have a pre-trade compliance system in place.

Over the last few years, fund groups have become more receptive to adding functionality to compliance systems because of the growth in assets across the entire investment industry, Kirwan said. Volatility in the stock market, along with an increase in trading activity and expansion of the types of securities being traded has also pushed firms to consider upgrading or enhancing compliance systems, he explained.

Also being eyed on the horizon are systems that facilitate straight through processing (STP.) The Securities Industry Association postponed its requirement that firms should clear and settle securities trades the next business day (known as trade plus one, or T+1) until June 2005. T+1 will be a day of reckoning for all trades to be entered once, so that they can seamlessly make their way through multiple channels and multiple parties en route to final settlement.

"As people improve the settlement process, they will also have to bring the compliance component forward," Kirwan added.

Another technology emerging as a must-have for the well-appointed compliance department is the Message Bus, also known as Mbus. The Message Bus is a messaging technology that allows lots of different systems to connect to it as a central bus depot of sorts. Instead of having to build complex and costly separate interfaces to all existing applications or systems within a firm when a new technology is brought in, all are easily connected to one another through a central Message Bus software system.

"A Message Bus serves as the post office for messages," Kirwan said. The system will accept a message or instruction, then output a message to the appropriate channel. Firms can build their own messaging routing rules into the system, which provides maps for exactly how and to where specific messages are to be relayed.

Not only does Message Bus technology allow companies to easily add or subtract systems, but the technology also facilitates the industry's evolution to 24/7 global trading, which can allow for compliance tracking from virtually anywhere.

Many of the industry's well-known technological players are likely to continue to evolve technologies as needs change and increase, according to industry insiders. Popular current systems include LineData Services' LongView Trading System, Charles River Development's ComplianceMaster, the MacGregor Financial Trading Platform, and Thomson Financial's PORTIA and Oneva Trade EQ.

Many tech providers have built, refined and are still adding capabilities to systems that can dovetail across functions, including portfolio management, order entry and compliance. But while integrated suites of services are being offered, some fund groups are cautiously dipping their feet into new technology one toe at a time.

According to Lorelei Skillman, director of marketing communications at Charles River Development, while the firm caters to buy-side investment managers, only 25 or so utilize ComplianceMaster.

Copyright 2003 Thomson Media Inc. All Rights Reserved.