Regulators Weed Out Funds

Terry Flanagan

Regulatory changes may be a nuisance for established fund managers, but for those looking to enter the market, it may be a deal breaker.

Although perhaps perpetuated by the financial crisis, there has always existed a gap between regulators and market participants. The gap has now expanded to market participants’ technology providers, especially on the buy side, in the post financial crisis world.

In the bridging the gap between regulators, and buy side firm, “technology will lead the way,” noted Amy Lynch, founder and president of FrontLine Compliance. Lynch was formerly with the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).

For Lynch, staying compliant stretches past simply “being compliant,”—it’s largely about proper representation of data. “The key for firms will be to pull data together, and pull it in different formats, to provide it for different entities—they’ll need to figure a way to do these themselves or do it through administrators.”

Lynch’s emphasis of building, or buying proper technology to meet regulators’ demand syncs with general market sentiment that buy side firms need automation of processes from their technology providers.

“Regulation has significantly changed the business model; we can’t do things with QuickBooks anymore,” said Steven Goldberg, principal of advisory services at global audit, tax and advisory firm, Grant Thornton LLP.

“To run a regulated business, you can’t use spreadsheets or any manual processes anymore. Providing the right information on a compliance basis will raise the cost of (buy side) entrants—regulators are narrowing the field.”

For Goldberg, buy side firms entering the marketplace alongside the new wave of regulation will need to operate business “like how broker-dealers run their businesses, and deal with FINRA and generally, regulatory oversight. They have a structure set up of rules and policies.”

Regulatory infrastructure may still be gaining ground among buy side firms, exercising technology providers’ capabilities to “oversee compliance data, and support new models,” noted Dennis Lee, manager at Deloitte & Touche. Lee noted some firms have up to 300 people overseeing compliance.

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