It’s not just bad investments that CIOs need to worry about—poor regulatory compliance can also result in significant financial losses, according to the Regulatory Fundamentals Group (RFG).
“CIOs, investment committees, and trustees need to demonstrate that they take their regulatory obligations seriously.”Regulatory exposures and risks—and the accompanying potential for expensive fines and legal settlements—are increasing as regulators double down on enforcement, RFG warned in its white paper, “Investment Behaviors in the Age of Enforcement.”
Investment offices, therefore, need to ensure they have the proper risk assessment and compliance programs in place, said Deborah Prutzman, RFG CEO.
“With regulators focusing more and more on the personal responsibility of gatekeepers for compliance lapses, chief investment officers, investment committees, and trustees need to demonstrate that they take their regulatory obligations seriously,” she said.
In particular, RFG highlighted four regulatory concerns that carry “major price tags” for violations: The Foreign Corrupt Practices Act (FCPA), sanctions requirements, required reports, and antitrust rules.
Sanctions violations alone accounted for almost $600 million in fines in 2015, RFG reported. However, out of the 39 endowments the group surveyed for the report, just five reported having compliance policies aimed at addressing sanctions requirements.
Meanwhile, RFG said investment offices and their external managers also face significant penalties related to required regulatory reports—either for failing to file on time or for submitting inaccurate reports. For example, OZ Management, an advisor for Och-Ziff funds, was fined $4.25 million by the US Securities and Exchange Commission in July for providing inaccurate trade data to prime brokers.
To avoid costly enforcement, RFG said investment offices need to build compliance programs tailored to their specific needs. Factors such as whether asset owners make direct investments or invest strictly through third-party managers can affect with which regulatory requirements an investment office must comply, and therefore what practices are necessary.
In addition to assessing risks and setting policies, RFG said investors need to regularly test the effectiveness of their compliance procedures, as well as provide training on at least an annual basis.
“In today’s regulatory environment, going through the motions is not sufficient,” Prutzman said.