Intermediary relationships are complicated arrangements and do not lend themselves to one standardized type of oversight program. A fund’s ongoing monitoring will vary in frequency, content, and scope, based on the type of intermediary, its business model, and the information deemed necessary.
A fund’s oversight of intermediaries performing these activities is critical, and includes some review of the adequacy and effectiveness of an intermediary’s compliance controls. The level of review deemed appropriate is determined by fund management.
Intermediaries perform a range of vital functions for funds and fund shareholders, such as applying fund policies; providing disclosures, confirmations, and account statements; calculating breakpoint discounts; and monitoring for frequent trading.
Partnering with Nicsa, Delta Data recently sponsored a webinar on Managing Risk Throughout the Intermediary Lifecycle moderated by Polly LeBarron 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, including the crucial aspects of an ongoing review process.
TOOLS OF ONGOING INTERMEDIARY OVERSIGHT
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.
To achieve oversight objectives, funds often will use a combination of methods, such as:
- Risk-based assessment of each intermediary
- Periodic questionnaires on operational and compliance practices
- Periodic certifications from intermediaries on compliance and operational obligations outlined within the firms’ selling and/or servicing agreements
- Review of third-party reports, such as:
- FICCA
- AT Section 801 (formerly SSAE 16)
- Other available third-party reports
- Data transparency, such as:
- Monitoring under SEC Rule 22c-2
- Receipt of Omni/SERV files
- Site visits to an intermediary’s office(s)
- Conference calls with the intermediary to discuss compliance controls
- Review and validation of invoices submitted by intermediaries
- Review of the general status of the day-to-day relationship
- Review of negative news from regulatory and media sources
Choosing from the tools highlighted above, funds determine the best method(s) to oversee the designated intermediary. The FICCA provides funds with a comprehensive report covering multiple essential functions/areas performed by an intermediary and, when available, has grown to serve as a preferred tool for funds to achieve cross-functional oversight.
OTHER ONGOING REVIEW CONSIDERATIONS
It’s important for funds to ensure that their oversight program is documented, and is reviewed on a regular basis. As the distribution environment continues to evolve, programs should evolve as well, and continued attention to this key component of your comprehensive compliance programs will help you to meet the needs of the changing business and the evolving industry.
Automated dashboards and reports help manage the day-to-day activities around oversight initiatives, and integrated reporting and analytic features help track assets, distribution fees, and trading violations across your dealer network.
We previously discussed the funds’ tract of governance related to the onboarding side of intermediary oversight. There’s also a separate tract of governance as part of the ongoing oversight which also contains many of those same groups. As part of both the onboarding and the ongoing oversight processes, funds strive 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.