Overseeing the Outsourcers

Terry Flanagan

Investment firms that outsource fund administration still carry risk.

Investment management firms that outsource key pieces of infrastructure, such fund administration, are under pressure from regulators to provide independent oversight and control of such activities.

“The conundrum that asset managers are facing is that while they’re outsourcing fund administration services, they still must maintain independent oversight,” Nathan Travell, senior product manager at Milestone Group, told Markets Media. “You can’t let providers mark their own homework.”

In the United States, the SEC requires registered investment companies to adopt and implement written policies and procedures that provide from the oversight of compliance by each investment advisor, principal underwriter, administrator and transfer agent.

The German Federal Financial Supervisory Authority released a circular in 2010 stipulating that an investment company must always have available sufficient staff and resources to monitor its outsourcing arrangement.

“As more and more fund administration activities are being outsourced, it’s becoming an area of focus for global regulators,” said Travell.

Milestone Group’s pControl Fund Oversight platform enables asset managers to automate independent verification or oversight functions.

“We help asset managers that have outsourced fund administration activities mitigate risk by assessing the quality of such services,” said Travell. “Our value proposition is to help automate that function.”

For example, pControl independently verifies the move of prior and current day NAV [net asset value] and unit price values to an independently generated NAV and price.

Asset managers have struggled to varying degrees with the challenges of delivering the appropriate level of oversight without replicating or “shadowing” outsourced functions, Travell said.

“Some are shadowing everything, which is counterproductive,” said Travell. “Mostly, the oversight junction is being performed manually, where data comes in from service providers and quality checks are run against it.”

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