Interesting article in FundFire recently regarding compliance. Apparently, there is between a 25% and 40% rate of error in the coding of compliance rules within the typical investment management firm. If true, this is indeed a “shocking” statistic as the title of the article effectively conveys. In delving deeper into the article, however, it seems that the firm creating the headline is an industry consultant in the business of evaluating the compliance rules libraries for investment firms, which certainly might call into question such a sweeping assessment.
While hiring third-party firms to evaluate compliance rule libraries is certainly an option for firms who are concerned about their compliance systems, it is a reactive approach at best. A more proactive approach is for investment management firms to adopt data governance procedures internally and look at the firm’s compliance data requirements on an enterprise basis. Getting to the root of having effective compliance can be largely a matter of analyzing the underlying data itself and many compliance issues stem from the age old “garbage in, garbage out” problem. This is where technology can help. By adopting EDM (Enterprise Data Management) tools, investment managers are better able to make sure that the data used for their compliance systems is accurate and up to date. This, combined with the regular back testing of compliance rules, can prevent minor issues from becoming major problems.