Downgrade Ushers In Compliance

Terry Flanagan

A major market event, such as Standard & Poor’s downgrade of U.S. debt on August 8, left much newfound work for money managers to inform their institutional clients about changes that need to be made to their portfolios. Many pensions, endowments and foundations are unable to hold subprime bonds.

But, investments guidelines mainly diverge due to size of the institution, according to Amy Lynch, president of FrontLine Compliance, a provider of compliance services to the investment industry, such as investment advisers, investment companies, hedge funds, and insurance company affiliates.

“If institutions were smart with their funds, they would have been diversified,” Lynch said “But if they can only hold triple A instruments and had other various restrictions, then that could cause a problem with their account guidelines. We want to make sure the money managers go through this exercise (of checking in with their intuitions).”

For institutions, notably pensions, investment committees meet as infrequently as once a year to outline their investment policy. Those that were specific about what instruments they could invest in received fewer phone calls from their compliance officers, noted Lynch.

“If institutions were not specific on how their deemed their risk tolerance, those firms got phone calls, from their money managers inquiring about how they want to handle the situation, in this case, the debt downgrade.

New compliance in order, set by market events such as a downgrade, is completely removed from the underlying causes of the downgrade, which has been pegged as mainly a political message

“The general consensus of the downgrade is that it is mostly political, but regardless of how (policy makers) came up with it, money managers have to comply with it,” Lynch told Markets Media.

And that may mean compliance officers will be busy in the weeks ahead. “We’re seeing our kind of business pick up, not just because of the downgrade but in general, “said Lynch. “There’s more focus on the regulatory side of the business.”

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