Although intermediary oversight has always been a significant focus of the mutual fund industry, certain regulatory initiatives over the years have elevated oversight management.
As new and expanded compliance requirements have emerged, fund complexes have enhanced oversight procedures and programs to ensure that intermediaries—as important business partners of funds and fund shareholders—are meeting their obligations.
Partnering with Nicsa, Delta Data recently sponsored a webinar on Managing Risk Throughout the Intermediary Lifecycle moderated by Polly LeBarron, Vice President, Services & Strategy, where industry experts and leaders of Intermediary Oversight teams discussed strategies and best practices to follow to mitigate risk at each stage of the intermediary lifecycle.
Intermediary Oversight Onboarding
The intermediary lifecycle starts with the onboarding process, and as our webinar panelists described the components of their respective oversight programs, it was evident that firms tend to apply similar onboarding best practices due to standardization within the industry.
Organizationally, some firms have Implementation teams that will manage the onboarding of a new intermediary – a process that typically starts with the due diligence questionnaire where they delve into what type of firm it is, how it’s registered, whether they have a control document like a FICCA or a SOC 1, trading methodology, and other information gleaned to get a clear picture of the intermediary.
Firms have been very open with the ICI as well as other organizations and industry groups about sharing oversight best practices. The more standardized the onboarding process, the easier it is for the intermediaries.
Role of the FICCA
Before the development of the FICCA, intermediary oversight was particularly challenging for both funds and intermediaries, due largely to the volume of requests for information and to the lack of a standard mechanism for exchanging information. Intermediaries were receiving multiple, largely duplicative requests for information and data from fund complexes with which they had relationships. Some funds were frustrated with intermediaries’ varied degree of responsiveness to their requests for information.
Recognizing the benefits of creating a standard, efficient way for financial intermediaries to report on the effectiveness of their control environment, a working group of ICI member firms and representatives of the four national accounting firms developed the initial FICCA engagement framework in 2008. That standardized a lot of it so that it made it much easier for intermediaries to be able to respond.
If a FICCA report is unavailable, or if an intermediary has not undertaken a FICCA engagement, the overall framework can still be valuable to a fund. The FICCA framework and its 17 areas of focus can assist the fund in reviewing other third-party audit reports, and in targeting certifications, questionnaires, or due diligence meetings to specific areas/functions of importance. The framework is a valuable tool to assist the fund in mapping functions performed by the intermediary to appropriate oversight tools and ensuring coverage of all applicable areas.
Typically, in an initial phase in the development of an oversight program, funds risk-rank their intermediary relationships based on a number of factors, such as the size of the relationship, the type of intermediary (e.g., broker-dealer, retirement plan recordkeeper), the services provided, and the amount of servicing/recordkeeping fees paid to the intermediary.
The risk-ranking process generally assists the fund in establishing a scope of review and oversight review cycle for each intermediary relationship. As a result, funds generally develop an oversight program that is tailored to address the array of relationships into which it has entered.
The governance structure of oversight is critical within every organization.
As part of the onboarding process, some firms have an internal Intermediary Review Committee. Oversight teams present the case of each individual intermediary and outline any risks they may carry to the firms’ review committees to vote upon.
This serves as an additional best practice to ensure that all parties within the firm are on the same page as it relates to intermediaries. The information is presented to the review committees in a way that is impartial, as governance committees are often the decision makers as it relates to intermediary relationships.
Often, as part of the intermediary onboarding process, various groups take part in the initial review, including contract management groups as well as larger oversight groups that include legal, compliance, sales, and various other business areas that provide input. All of these groups within the organization get together to share information on an intermediary from an onboarding perspective.
While there is a tract of governance on the onboarding side, there’s also a separate tract of governance as part of the ongoing oversight which also contains many of these same groups. As part of both the onboarding and the ongoing oversight processes, organizations make every effort to ensure that every review entity receives the same information concerning the intermediary.
Contact us to learn more about building a strong intermediary oversight program and how Delta Data can help you manage risk throughout the intermediary lifecycle.