In the last decade, the term compliance has become more nuanced than arguably at any time since the 1930s. The five-pronged approach to compliance is often organized as such:

  1. Only invest our clients in the right investments;
  2. Maintain books and records;
  3. Oversee employees to ensure they are acting ethically;
  4. Advertise without lying; and,
  5. Bill the clients correctly

With advances in technology, the SEC and FINRA have expanded the scope of each prong and its application in modern practice. While the first compliance prong now has a REG BI component, the maintaining books and records element will require some firms to have technology storage that is both auditable and immutable. Moreover, the employee oversight and advertising rules are expanding to include a firms obligation to monitor for suspicious employee trade activity, as well as incorporating the new Investment Advisor Marketing rules that went into effect last May (find my write-up here). And, of course billing is always a topic of great scrutiny.

Advisor and broker-dealer compliance responsibilities have also expanded, primarily for three reasons:

  1. Investors seek not simply to grow their investments, but also their guidance to help them lead better, more fulfilling lives.
  2. Investors have access to more information about investments than ever before, so a simple graph comparing performance to a benchmark no longer cuts it.
  3. The industry, like all others, has had its share of bad apples that have misled or, worse, intentionally lied to investors.

With voluminous data at our fingertips, the life of a compliance officer has become much more interesting. Therefore, maintaining a practice in 2022 requires sophisticated technologies, such as RCI, querying large swaths of data through tools such as data mining, and managing cross-platform integrations to ensure that the correct data is captured in the right places.


What’s Next for Regulations?

With the regulatory landscape evolving to keep pace with technology, what could be next? The likely answer is regulation around environmental, social, and governance (ESG) investing and its impact on investors.

In a recent survey of Black Diamond users, opinions were interestingly divided on ESG. Some firms believe that ESG will differentiate them from other firms. Others, frankly, think ESG is a marketing term and treat it as such. These are opinions and can exist simultaneously. Conceptually ESG is a combination of putting our clients in the right investments and advertising our practices appropriately. Although compliance requirements are more defined, one principle has remained constant: protecting investors to the best of our ability, including from misleading statements made by firms in client communications or advertising. For example, suppose investors require us to consider factors such as ESG. In that case, we must respond to those client expectations, and if we advertise ESG capabilities, we must do so without misleading the investor.

Recently, Gary Gensler, the 33rd Chair of the SEC, recently posted a video to his verified Twitter account regarding ESG advertising that said much of what I am saying (though perhaps with better lighting and production quality).


ESG and the Current Regulatory Landscape

Right now, ESG means different things to different people. For example, when I think of ESG, I think of the carbon impact of funds. Others, however, focus more on the social and governance aspects – for example, the diversity of boards or investments by companies in some world regions. This ambiguity can lead to investors and advisors discussing ESG while looking at it through entirely different lenses. I believe the SEC is trying to address this ambiguity to protect investors from being misled.

One of the interesting points from Chair Gensler’s post is the concept of normalization of vocabulary – words used in an investment context must be consistent in their meaning. This follows the SEC seeking comments on how disclosures should address climate change. The SEC has also formed a task force to “analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”


How SS&C’s Black Diamond Wealth Platform Can Help

Based on Chair Gensler’s comments, the normalization of nomenclature is only part of the objective. It is also essential to report on the results of ESG-based investment decisions. For example, a client and advisor may agree that the client wishes to invest a certain way, but without reporting and disclosures, the investor is left to take the word of the firm that the investments adhere to that agreement.  Regulatory initiatives, therefore, may start with normalization of vocabulary and disclosures but then move quickly toward how investors can view ESG data and metrics on their reports, statements, and client portals.

This is where the Black Diamond® Wealth Platform is your partner in success. We live and breathe reporting, data aggregation, and analytics. SS&C is playing a leadership role in ESG reporting and, as early as March 2021, Black Diamond was discussing the impact ESG could have on the market. The Black Diamond team is actively exploring ways to expose and break down ESG data to both advisors and investors. Cross-theme initiatives target the ability to analyze accounts and their grouping levels, whether by class, segment, book of business, or ESG criteria. These include:

  • Group-By-Anything
  • Business Intelligence
  • Data Mining

In addition, the Client View and Timeline applications continue to evolve to provide a more comprehensive advisor-investor dialogue. ESG, then, is not just a theoretical concept, but also a tool to analyze your success in meeting client expectations and to communicate effectively and regularly with your clients about what is important to them. In doing so, you meet the two critical takeaways from Mr. Gensler’s message: quantify and communicate. 

Technology may have made compliance a little more complex than a decade ago. However, technology can also address new compliance challenges as we enter a new era of investment management. After all, methods of compliance may have changed, but the overriding goal of compliance has not – to protect investors by giving them the information they need.

Request a personalized demo today to see firsthand how the Black Diamond Wealth Platform can support your firm’s compliance needs.