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Fund Your Compliance Systems Properly, Panel Urges

ORLANDO, Fla. - Compliance automation is necessary in this day and age, but it's no way to shrink the bottom line, said experts speaking on the Investment Company Institute's Tax and Accounting Conference panel on using technology for compliance and disclosure.

More than a year into the Sarbanes-Oxley Act, firms are now looking past the first wave of simply meeting the requirements of the law and are now concentrating on retooling to leverage technology for compliance and disclosure in the most efficient ways. However, panelists here warned attendees of the pitfalls of focusing too much on trying to save a buck.

While these systems don't come cheap, if implementation is not sufficiently funded at the start, firms will pay for it dearly later. "Do not scrimp on the front-end stuff," cautioned Paul Kirwan, partner at accounting firm Deloitte & Touche. He said that many preventable problems can arise later on that can cost the firms not only money, but also cause headaches if companies try and cut corners.

With the economy still dumping jobs weekly and the financial services industry entering the season most likely for layoffs, the group also noted that implementing these systems is a way to increase efficiency, but warned that it shouldn't be seen as a shortcut to paring back the workforce. "Putting a compliance system in place is not a way to save bodies," said Christine Carsman, vice president and senior counsel at Wellington Management Company. "It's simply not true."

"Technology is a tool. It's not going to replace your compliance process," she said. The group emphasized the importance of remembering that even the best system available cannot replace smart people thinking about restrictions, a properly trained compliance staff and an analysis of exceptions. So it's extremely important to have sufficiently staffed departments that can work in areas that the systems cannot. Non-compliance can cost firms a potential growth in assets as well as have wide ranging implications, both economically and legally.

Selecting A System

A hot topic of discussion was selecting a system and why. One of the biggest questions a firm must ask is whether it wants to implement a pre-trade, pre-NAV, or post-trade method. The panel agreed that while all three have unique benefits, establishing a post-trade system is usually the most practical, initially. Kirwan said that rolling out a pre-trade system is difficult and that a lot of firms start out with post-trade systems and then work outward from there.

Carsman said her firm has a pre-trade and a post-trade system. "At the end of the day I think most organizations end up being a combination of pre-trade and post-trade compliance systems," she said. The systems and all the technical know-how required can get complicated. It starts to get sticky when multiple vendors for various applications are involved, the panel said. Connecting applications, having multiple sources of data for each application, inconsistent data among applications, evolving technologies, legacy systems and data and work flows all are other things to be considered.

Build, Buy Or Outsource

One of the most important decisions a firm has to make in regards to compliance is whether to build or buy a system or to outsource the work.

Carsman said her firm built a system because it wanted to control the platform, but that building a system is not the right fit for all firms. Her firm wanted to design a system that could be an informational tool for their portfolio management staff as well. Even so, she cautioned that building a system is still not a way for firms to save money either. There is always a need to have money now and in the future for changes.

Building a system allows a firm more control over the platform and function and minimizes connectivity issues. It allows the firm to set its own priorities and creates a significant knowledge base from within the firm. However, it requires a capital commitment both because of higher start-up costs and maintenance costs over the long haul. A bottom-up build also distracts IT resources from other potential projects

Buying a system has its own drawbacks. While the capital outlay and developmental costs are borne by the vendor, the integration requires in-house development. There is limited control over the platform and processing of change requests. It also locks in a continuing expense for the firm and requires it to rely on an external party for the important functions the system is meant for.

"Outsourcing is really being able to step away from the headaches, but there are others," said Roland Caron, managing director of Brown Brothers Harriman & Co. Outsourcing is a time-saving, quick solution approach, the panel said. It helps to minimize costs and allows the focus to be on compliance issues, not system constraints. The system issues and data scrubbing are borne by the service provider.

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