Although it’s been over 10 years since the late trading and market timing scandals rocked the mutual fund industry, intermediary oversight remains an area of focus for fund companies, their boards, and regulators. The industry move to omnibus brought efficiencies to the broker/dealers while taking transparency from funds, thereby casting a spotlight on the need for funds to have a formal oversight program.
Intermediary oversight discussions were prevalent at the 2014 NICSA General Membership Meeting in Boston on September 11 and 12. Several sessions addressed different aspects of oversight providing multiple points of view, but a few common themes emerged.
First, everyone expects oversight programs will evolve with the changing landscape, business needs, and potential regulations. For those reasons, Tim O’Sullivan, a Director in Deloitte & Touche’s Finance and Operation Risk Transformation practice, stresses the importance of sustainability and having the right controls, tools, and systems in place to manage an oversight program. Funds should structure contracts so that policies and procedures can be tested and perform periodic tests of those processes, ensuring they remain relevant in today’s environment.
Audit reports such as the SSAE16 or the Financial Intermediary Controls and Compliance Attestation (FICCA) are key components of an oversight program, but it is important for funds to know what to look for and when to ask questions.
Funds often rely on informational files from intermediaries such as financial activity and account positions to perform oversight activities including invoice validation. Lisa Klassen, Principal, Mutual Fund Operations with Edward Jones, cautions that given the number of accounts held in omnibus positions, the files are becoming difficult to manage. They take hours to produce on the weekends, and then funds struggle to consume the data upon receipt. Klassen called for the industry to work together to find efficient solutions that work for all stakeholders.
Finally, leveraging relationships is critical. While it may take in excess of 60 days to complete the overall due diligence review of a single intermediary, leveraging existing relationships helps the process move along. Working with intermediary oversight myself, one thing I’ve observed is people’s desire to talk with one another, build and strengthen relationships, and share best practices. Let’s continue the conversations. What are you doing about intermediary oversight?