The importance of investment compliance in asset management

Published on October 30, 2024 by Chetna Verma and Vagdevi Maddipati

Introduction

Investment compliance refers to adhering to laws, regulations and internal policies and procedures that govern the investment sector. It ensures that all investment is carried out in accordance with the rules and regulations set by regulatory authorities.

What is asset management?

Asset management is the process of increasing the value of an investor’s portfolio over time by acquiring, retaining and investing in companies with potential to grow in value. Asset management services are generally provided by specialised firms to individuals, government entities, corporations and institutional investors.

Why is investment compliance important?

Financial compliance became a major concern for regulators and other concerned parties after the 2008 global financial crisis. Strict financial compliance may have prevented the loss of pensions and savings for home and retirement and reduced the overall effect of the recession. Financial compliance by the banking system is also important for maintaining the public’s trust in capital markets, as without strict compliance, investors are at higher risk of losing their investments, harming markets and the public.

Why is investment compliance important in asset management?

Investment compliance plays a vital role in asset management by adhering to laws and regulatory guidelines, protecting investors and fostering market integrity. It also helps prevent violations, misconduct and fraud, safeguarding market integrity and financial stability.

An asset management company can establish a solid compliance framework by taking the following steps:

• Staying up to date on regulatory guidelines

• Implementing appropriate and well-defined internal procedures

• Conducting regular audits

• Avoiding common mistakes

• Promoting transparency and accountability within the organisation

Importance of investment compliance in asset management

• Ensures regulatory compliance: Investment compliance ensures that all investments comply with the rules and regulations set by regulatory authorities (e.g., SEC/FINMA) and client requirements. 

• Protects investors: Compliance ensures that investor’s assets are managed in accordance with rules and regulations that aim to protect investors. Operating in the best interests of clients enhances investor trust and confidence in the market.

• Mitigates risk: Compliance frameworks help asset managers to identify, assess and mitigate risk associated with investment activities, such as market risk, operational risk, compliance risk and legal risk.

• Maintains trust and reputation: Adhering to compliance standards showcases a company’s ethical practice, increasing investor trust. Trust and credibility are crucial for maintaining reputation. 

• Ensures informed decision-making: Compliance policies and procedures provide clear guidelines and standards for investment activity, enhancing efficiency and resulting in informed decision-making and the development of robust investment strategies.

• Prevents financial crime: Compliance helps prevent illegal activities such as money laundering, fraud and insider trading.

• Helps to adapt market changes: Rules and regulations in the financial market keep changing in line with market conditions, geopolitical factors and new technologies. Compliance programmes enable asset managers to keep abreast of such changes and adapt their approaches and actions accordingly.

To summarise, investment compliance is not just a regulatory requirement; it is an essential component of responsible asset management that safeguards investors, reduces risk, maintains trust and promotes long-term growth in financial markets.

How compliance affects investment strategies

Compliance regulations have a significant impact on an asset manager’s investment decisions. Investment firms need to ensure planned investments are aligned with permissible securities and investment instruments by evaluating them according to regulatory requirements. Investment compliance will make sure a portfolio’s structure is aligned with regulatory standards.

Investment managers need to conduct regular compliance audits to ensure adherence to regulatory standards and maintain records accurately. Compliance monitoring involves analysing portfolio performance, tracking securities transactions and evaluating risk-management methods. Any non-compliance issues must be addressed and rectified immediately to mitigate risk.

Consequences of failing to meet compliance standards in asset management

• Legal and regulatory penalties: Regulatory bodies have the authority to impose fines, sanctions or legal action against asset management firms that fail to comply with regulations. These penalties can be substantial and significantly impact financial health, damaging an organisation’s reputation.

• The largest fine in 2021 was imposed on Dutch bank ABN AMRO; prosecutors in the Netherlands slapped a hefty EUR480m fine due to allegations of money laundering.

• Loss of clients and business opportunities: Investors are less likely to entrust their assets to a firm with a history of compliance failures. Clients would withdraw, and new business opportunities would decline.

• Investor lawsuits: Investors may file lawsuits against the firm and managers for losses incurred due to compliance failures.

• Loss of licence or registration: Regulatory bodies may revoke a firm’s licence or registration, effectively shutting it down.

• More than 396,000 companies in India were removed from official records for non-compliance in five years: 7,943 in 2016-17, 234,371 in 2017-18 and 138,446 in 2018-19, according to the Minister of State for Corporate Affairs Rao Inderjit Singh.

How Acuity Knowledge Partners can help

We are pioneers in investment services offerings. We create customised dynamic functions with a strong, responsive and proficient control framework and process delivery. Our experienced tool-agnostic team provides assistance with investment compliance, trade surveillance and corporate, forensic and crime compliance. These services are backed by our proprietary suite of Business Excellence and Automation Tools (BEAT), which provides domain-specific contextual technology.

Our teams of experts have a unique combination of skillsets. They have extensive experience in order management/compliance systems such as Bloomberg AIM, Ion’s Latent Zero Sentinel, Charles River Database (CRIMS), LDC, ThinkFolio and BlackRock’s Aladdin, BTCA and SMARTS.

Sources:

• Investment Compliance: Helping to Ensure Effective Asset Management – Planning Made Simple

• A Short Guide to Asset Management Compliance (redbeam.com)

• Financial Compliance – Overview, Importance, Regulators (corporatefinanceinstitute.com)

• Asset Management | Definition, Services, Process, and Benefits (financestrategists.com)

• Over 3.96 lakh companies removed from official records for non-compliance in 5 years – CNBC TV18

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