2018 Investment Management Regulatory Outlook

The impact of regulatory changes and uncertainty 

Gain insight into key regulations that companies in the investment management industry should be monitoring and addressing in 2018.

Embracing complexity: 2018 investment management regulatory trends

Most investment management organizations are forging ahead with their risk and compliance initiatives, even as regulatory uncertainty will likely remain a significant and ongoing challenge. Even if lawmakers and regulators make certain definitive changes, investment management organizations must continue to drive the effectiveness and efficiency of their risk and compliance programs so they meet applicable laws, regulations, and supervisory expectations. And in most cases, they don’t have the time or luxury of waiting to see how things will shake out.

Fortunately, many of the changes investment management organizations are making to achieve compliance are useful improvements that are worth doing from a risk and business perspective.

Read on to learn more about the investment management regulations we’re tracking for 2018.

This publication is part of the Deloitte Center for Regulatory Strategy annual, cross-industry series on the year’s top regulatory trends. Learn more about regulatory challenges and opportunities in other industries on our regulatory outlook homepage.

Mutual fund modernization

In October 2016, the US Securities and Exchange Commission (SEC) adopted new forms, rules, and amendments that require mutual funds to collect a significant amount of additional data and to report that data monthly (Form N-PORT) and annually (Form N-CEN).

To satisfy the requirements, fund sponsors and service providers will need to invest in people, processes, and technology between now and July 2018 to support those mutual fund complexes that have $1 billion or more in assets under management. Smaller fund complexes (those managing less than $1 billion in assets) will be impacted in 2019.

Some key challenges for fund sponsors and service providers include:

  • Data sourcing and aggregation
  • Operating model decisions
  • Resourcing needs
  • Service provider oversight

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Fiduciary rule

The Department of Labor's (DOL) delayed the full applicability date of its "Conflict of Interest Rule" on fiduciary investment advice (the "Rule") from January 1, 2018, to July 1, 2019. Other regulatory agencies have indicated that they’re exploring similar rules for wealth management professionals that would require a fiduciary standard of care when delivering advice to retail investors.

Despite delays to the DOL rule’s implementation dates, the Rule continues to serve as a catalyst for change across the wealth management industry. Many of the wealth management marketplace implications were highlighted in a 2017 Deloitte & Touche LLP report for the Securities Industry and Financial Markets Association (SIFMA). Key themes included:

  • Increase in fee-based accounts for retirement investors
  • Reduction in product shelves and enhanced product due diligence
  • Enhanced rollover and due diligence processes

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Liquidity risk management programs

Last year, we discussed the SEC adopting a new rule and form designed to promote better liquidity risk management by registered investment companies. The new rule (Rule 22e-4) requires funds, including exchange-traded funds (ETFs), to establish liquidity risk management programs. ETFs that qualify as “in-kind ETFs” are exempt from some of the rule’s requirements, and money market funds are exempt from all requirements.

The rule lays out numerous elements the SEC staff believes a liquidity risk management program should include, specifically:

  • Assessment, management, and periodic review of a fund’s liquidity risk
  • Classification of the liquidity of fund portfolio investments
  • Determination of a highly liquid investment minimum
  • Limitation of illiquid investments
  • Board oversight

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Data analytics

There are many opportunities to apply automation and artificial intelligence across the compliance lifecycle to drive significant gains in efficiency, quality, and productivity. Examples include:

  • Combining advanced data analytics with analyses of email communications and external news to detect potential insider trading activities
  • Enhancing testing through robotic automation
  • Improving regulatory compliance by using natural language processing (NLP) applications to extract regulatory requirements and then mapping them to control activities

With the SEC using advanced analytics and other cognitive technologies to identify and prioritize high-risk areas, investment management firms and compliance functions could benefit from using those same kinds of tools to gain better insight into their business and compliance processes.

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The investment management industry has seen a shift as the regulatory environment has driven organizations to take a serious yet fresh look at the state of their cybersecurity risk management programs. Institutions at both the state and federal levels remain committed to protecting investment management firms from the influx of cyber threats and to raising the bar on cyber risk management and reporting. And all signs point to this behavior continuing for the foreseeable future.

Demonstrated compliance with leading practices and cyber regulations may be useful for investment management firms with both consumer and investor stakeholders. To that end, the American Institute of Certified Public Accountants (AICPA) unveiled a cybersecurity risk management framework, which strives to expand cyber risk reporting to address expectations of greater stakeholder transparency.

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Governance, risk, and compliance

Focusing on governance, risk, and compliance (GRC) is considered an industry norm. But in practice, many firms are struggling to establish an effective GRC strategy and implement a GRC program.

An important part of GRC is integrating a variety of disparate disciplines and business activities, including:

  • Assessing the strategic alignment of business initiatives against the firm’s overall risk management profile
  • Vetting new business initiatives against risk/reward
  • Determining the firm’s risk appetite for business activities and then measuring against it
  • Establishing and maintaining “tone from the top” and a “culture of risk and compliance”
  • Evaluating key risks and issues across the entire organization, not just from one methodology
  • Establishing aggregated reporting to capture key risk and control data across common methodologies

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Operations risk

Financial services organizations rely heavily on technology to support their business needs. Historically, these organizations have invested significant time and money to address the requirements of an evolving market. However, with market volatility coming to the forefront in the last decade, the financial services industry consolidated, leaving firms saddled with complex, fragmented infrastructure of legacy systems.

Transforming a firm’s operating model in today’s financial markets is a complex challenge. To make it happen, consider a phased approach when designing the target state. Understand what “good” versus “best” looks like—and what each scenario costs. Identify the tangible and intangible benefits of each scenario. Understand the investment required and build leadership consensus around the path forward. Build a plan to enable the change, executing at a pace that’s appropriate for your firm.

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Taking decisive action in uncertain times

Regulatory uncertainty remains a fact of life. But in most cases, waiting for absolute certainty isn’t a viable option.

Senior management will need to take decisive action while also paying close attention to emerging regulatory developments and staying as flexible as possible. The good news is that many of the changes investment management organizations are currently implementing make good sense from both a business and regulatory perspective. And they’re worth doing no matter how the future unfolds.

Learn more about these key trends and how embracing complexity can help you accelerate performance, stay ahead of change, and successfully navigate investment management regulations.

To read the full report, download Navigating the year ahead: 2018 investment management regulatory outlook.

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Look again

In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors. What are the key trends, challenges, and opportunities that may affect your business and influence your strategy? Look for more perspectives and insights from some of Deloitte’s forward thinkers.

Discover more Industry Outlooks.

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