5 Common Mistakes Advisers Make When Using Compliance Technology

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Learn about major pitfalls investment advisers should avoid when using compliance technology and practical implementation strategies.

Compliance technology offerings have proliferated in recent years, and that’s great news for investment advisers seeking to enhance effectiveness and efficiency in managing their compliance programs. However, the number, type, and complexity of offerings also pose a challenge for advisers, who struggle to select and implement the right compliance technology offering for their firms. In addition, given the increased use of such technologies, the SEC has begun to scrutinize firms, warning that the misuse or improper configuration of such technologies (termed “regtech”) can lead to compliance deficiencies.

For these reasons, it’s critical that advisers thoughtfully approach the selection and implementation of regtech solutions to avoid operational and regulatory risks. This post highlights five of the most common mistakes advisers make when selecting and implementing regtech solutions and offers practical guidance on how to avoid them.

Mistake #1: Misgauged Technology Needs

Too often, investment advisers fail to take the initial critical step of fully evaluating the firm’s needs when it comes to selecting the right regtech solution to adopt and implement. While many advisers understand at a surface level what they would like compliance technology to accomplish, choosing the right solution involves a much deeper analysis.

First, the needs and preferences of firms and their employees are paramount to consider when choosing any technology solution. For instance, when it comes to personal securities trade reporting, a firm and its employees may hold accounts at various brokerage firms. In this case, the firm may want to select a personal trading manager that collects account activity and presents data in such a way that facilitates reporting compliance.

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Second, it’s critical to understand how the regtech solution will integrate with other pieces of the adviser’s tech stack. A firm’s failure to consider how various technologies will coexist can lead to unpleasant surprises and breakdowns in implementation that could, in turn, result in compliance deficiencies. Therefore, before adopting a particular compliance technology, advisers should map out their compliance workflows and determine what role the regtech solution being considered plays in streamlining these processes.

Mistake #2: Deficient Due Diligence on Regtech Solutions

In many instances, investment advisers fail to spend enough time conducting due diligence on regtech offerings and their sponsors. The SEC expects advisers to conduct appropriate vendor due diligence, but too often advisers don’t have the time or resources to appropriately vet the technology solutions they are considering. Clearly, among the most important issues to consider is whether the regtech solution provides adequate data security safeguards. However, appropriate due diligence also involves other considerations.

One of the most important considerations is whether the regtech solution is sufficiently user-friendly. Usability can greatly influence proper adoption, implementation, and maintenance, particularly since most firm personnel, including compliance professionals, are not technology experts. For example, an automated compliance calendar can help firms schedule all their compliance activities, deadlines, and deliverables in one master calendar that integrates with an automated document manager. Tasks are streamlined and scheduled in a way that appropriately aligns with a firm’s compliance program needs.

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Firms may benefit from arranging tech demos to instruct compliance staff and other employees how to use the adopted technology. Personnel may also take advantage of user testing opportunities that allow them to give practical feedback directly to the regtech solution provider. These types of participatory design activities can dramatically improve product development and implementation.

Additionally, it’s important for advisers to gauge the level of support they expect to receive from the product sponsor. Compliance technology solutions inevitably require upgrades and maintenance from time to time, and compliance personnel may not have sufficient knowledge and skills to troubleshoot issues that arise. To solicit feedback on the level and quality of support and other functionality related to the regtech solution, investment advisers should seek out opinions from other firms that have adopted and implemented the regtech solution being considered.

Mistake #3: Insufficient Onboarding Time

Once they choose a regtech solution, many advisers fail to take adequate time to understand the functionality and integration of their newly adopted solution. Regardless of how user-friendly technology is, it will invariably take time to fully understand how it works and to integrate the solution into the firm’s tech stack. Such efforts will often involve robust communication between the compliance department and the operational and technology professionals at the firm.

However, employees in other departments may provide valuable feedback as well. For instance, if the regtech solution involves compliance tasks related to client onboarding, client services associates may be instrumental in ensuring that the regtech solution is appropriately customized and configured to meet the firm’s needs. It will often take time to ensure that any solution has the proper input and instructions to perform properly.

Mistake #4: Inadequate Employee Training

Advisory firms also sometimes fail to provide employees with adequate training on adopted technology. Training is fundamental because employees who use the solution improperly—or who don’t use it at all—could contribute to compliance deficiencies. Employees must understand not only the core functionality of the regtech solution but also the specific steps they are required to follow in order to use the solution appropriately. This training supplements the basic training that employees should receive regarding the firm’s compliance policies and the compliance procedures and workflows that are triggered by the policies. Robust training often requires repetition and periodic reminders. Additionally, employees should know whom to contact if they face challenges when utilizing the regtech solution.

Mistake #5: Overreliance on Technology

As advanced as many regtech solutions are, they cannot help an adviser accomplish all compliance tasks. Therefore, it’s important for advisers to understand their role when it comes to processing and reviewing the data generated by regtech solutions. Advisers should not assume that technology will always function properly. Adopting a regtech solution isn’t a “set it and forget it” exercise as technologies invariably require monitoring and troubleshooting from time to time.

When appropriate, an adviser should periodically conduct testing to ensure that the regtech solution is functioning properly. For instance, if the regtech solution is facilitating the calculation of advisory fees, an adviser should periodically sample some client fee billings to determine whether the solution is properly calculating such fees. This review will also reveal any shortcomings, such as insufficient inputs, that prevent the proper functioning of the compliance technology.

 

In summary, avoiding the five common mistakes above by following the suggestions provided here can significantly reduce the operational and regulatory risks associated with using regtech. This process does, however, require a commitment of time and resources by investment advisers.

What do you see as the biggest mistake to avoid when using compliance technology? Take our short survey.

 

About Our Guest Blogger: Richard L. Chen PLLC is a law firm that serves investment advisory firms by providing proactive business-minded solutions pertaining to corporate and securities law-related matters. Among other things, our firm provides counsel with respect to securities and compliance matters (including representation in SEC examinations), private fund formation, corporate formation and structuring, business transactions (including M&A and joint ventures), contract drafting and negotiation, employment law matters, operational due diligence, and succession planning. For more information, please visit our website at www.richardlchen.com or email us at rich@richardlchen.com.

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