An explosion of data, communication channels and a series of costly regulatory actions are driving a compliance overhaul by asset management firms, hedge funds and other investment organizations around the world, according to Coalition Greenwich.
In February of this year, the U.S. Securities and Exchange Commission (SEC) levied more than $81 million in fines against 16 prominent investment advisors for failing to properly maintain electronic communications records. Meanwhile, in May, more regulatory infractions surfaced. Several of Wall Street’s well-known private equity firms announced they were negotiating a settlement with the SEC over employees’ use of banned communication channels.
With regulatory enforcement heating up, Coalition Greenwich, in collaboration with Bloomberg L.P., launched a new study to understand the compliance challenges facing the investment industry, and how buy-side firms were working with new technologies and strategies to minimize emerging compliance risks.
The results, which were based on interviews with buy-side business management, risk, compliance, legal, and technology professionals in North America, Europe and Asia-Pacific, clearly demonstrate that increased regulatory scrutiny is pushing improvement in organizational risk controls—a response similar to that seen among sell-side firms in 2022 following $2 billion in SEC fines for social media and text recordkeeping lapses and the use of unauthorized communications channels.
“With the likelihood of further SEC actions down the pipeline, buy-side firms are elevating compliance to a top priority, and increasing technology investment accordingly,” said Audrey Costabile, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Global Buy-Side Compliance and Surveillance: Innovation as the Competitive Differentiator.
“Firms recognize the potential risks of failures, as well as the benefits of good compliance to investors, firm brand and fundraising efforts as the competitive environment gets tougher and margins further compress,” she added.
Rising Budgets, Shifting Priorities
Approximately 60% of buy-side firms expect compliance budgets to increase in the next 12 months, including nearly 1 in every 10 expecting growth in spend of more than 25%. Much of that investment in the future will be used on systems to normalize and integrate existing data and systems.
Artificial intelligence (AI) will also be a top priority. While there is still some basic blocking and tackling to do, the utilization of AI/natural language processing (NLP) policies to enhance performance and reduce false positives sits prominently on the roadmap for the buy side.
“Firms are realizing the need to aggregate, normalize and contextualize information within a single workflow,” said Costabile.
“The ultimate goal for the buy side is the integration of all comms, voice and trade events, including both structured and unstructured data, into a single, seamless surveillance and reconstruction process,” she said.
The report analyzes buy-side compliance spending, technology requirements and investment priorities, and drills down to examine specific trends in communications surveillance, trade surveillance, voice/video surveillance, trade compliance, and risk controls.
The report also presents insights and data on the use of AI and advanced predictive and behavioral analytics, and on the integration of surveillance and reconstruction.
