Every investment management firm knows that even seemingly minor operational mistakes or regulatory oversights can have huge repercussions. Today’s economic and regulatory climate places a tremendous burden on management, directors and regulatory teams to provide increased financial reporting and transparency to both regulators and investors.

A great deal is at stake, and not just in terms of direct financial costs or legal and regulatory liability. To paraphrase über-investor Warren Buffett, it takes twenty years to build a reputation and, in some circumstances, just one mishap to ruin it. This is why controlling operational and regulatory risk is so important to investment management firms, their clients, investors, regulators and trading partners.

While increased regulatory demands are of concern for investment managers, within that challenge lies an opportunity. The data required by regulators and investors can also offer insight that can help drive business decisions. By approaching regulators’ transparency and data requirements with the right knowledge, and expertise, managers can meet those requirements, get deeper insight into their individual businesses, and differentiate themselves from the competition.

Components of a robust operational platform increasingly include an online dashboard which streamlines oversight of the regulatory and operating reporting process as it can integrate data across various accounts and products, including data from outside sources, and enables a high degree of transparency. Regulatory solutions should also be designed to help managers meet the requirements of FATCA and Form CPO-PQR while also enabling private fund managers to meet requirements of Form PF, Annex IV reporting under AIFMD and Open Protocol Enabling Risk Aggregation standards reporting (OPERA).

A global supplier of customised operating infrastructure and services to investment organisations throughout the world, SEI views operational and regulatory risk management as a primary objective. In selecting providers with whom to partner, investment managers should look for firms whose solutions solve the current problems at hand and also have the forward-thinking and innovative culture, and technology infrastructure, to anticipate future requirements, products and vehicles not yet developed.

The Top 10

Effective risk management – whether it be regulatory, operational, or technological –is the foundation of operational excellence, and investment management firms can benefit from taking a fresh look at common areas of risk. While there is no generic checklist for identifying operational risk, our “Top Ten” can help identify areas of risk that are frequently encountered by those who work in or around investment operations.

1. Complacency – Firms with a culture of complacency take a passive approach to regulatory and operational risk. Practices that place organisations at risk include hiring inexperienced or under-qualified staff, neglecting to train new employees, disregarding feedback from middle- and back-office staff, operating without a robust electronic document management system and blindly trusting employees’ work.

2. The Blind Leading the Blind –. When senior executives and managers lack a solid understanding of middle- and back-office workings, the operational and regulatory repercussions can be far-reaching. Managers who are unfamiliar with investment operations may rely upon subordinates who are also unqualified for the task at hand. Outsourcing has benefits, but it is not a panacea, and brings its own due diligence demands.

3. Novices, Apprentices and Soloists – Problem areas here include small, specialised teams that work in isolation, and individuals who assume sole responsibility for a function or relationship, often zealously guarding their “turf.” Thoughtful attention to organisational design, training and cross-training can promote teamwork and reduce key-person risk at all levels.

4. Dropped Batons – Information handoffs between people, departments, organisations and systems are fraught with communication and timing challenges. The most useful tools for identifying potential trouble spots are system diagrams that identify all applications and their interfaces, and workflow diagrams that display hand-offs between teams or departments and between the firm and external counterparties, service providers and clients.

5. Naïve Reliance on Technology – While automation is a powerful tool for producing consistent regulatory reporting and mitigating operational risk, it can create new hazards if systems are not carefully designed, implemented and kept up-to-date. To reduce those risks, make sure that staff and consultants know how to perform automated functions manually and understand their operational context, including system and workflow linkages.

6. Playbooks – Nonexistent, obsolete or incomplete process-and-procedure documentation is frequently a factor in operational breakdowns. The remedy is workflow diagrams that are kept up-to-date and readily available. Not only are such workflows important in the effort to lower day-to-day risks, they are also useful in new-hire training, system- and process-improvement initiatives and disaster recovery. Firms should also have well-defined issue escalation protocols that take into account both the magnitude and timing of potential impacts.

7. Amalgamated Assignments – When designing organisational structures, policies and procedures for the segregation of duties, it is critical to maintain the distinction between the firm and the fund(s) it manages. The issue goes beyond opening the door to fraud and embezzlement. Failing to clearly distinguish fund books and records from those of the firm can cause havoc when reporting to investors and regulators.

8. Reconciliation Gaps – Less-than-comprehensive procedures can leave investment managers unknowingly exposed to risks. To reduce that exposure, firms should conduct full reconciliations between their records and those of the custodians and administrators, with provisions for supervisory review and accountability.

9. Reading the Fine Print – Legal documents should be reviewed in detail by attorneys as well as knowledgeable operational managers. When assessing counterparty risk, firms need to identify exactly which legal entity is their counterparty, determine who has regulatory jurisdiction, and continuously monitor net exposures and the counterparty’s creditworthiness.

10. Poor Planning and Slow Response Times – Against a backdrop of expanding regulatory requirements, clients and investors are pressing firms to increase transparency, accelerate reporting, and reduce risks—all while lowering advisory fees. As the line between traditional and alternative managers continues to blur, planning for emerging developments in the market and regulatory environment is critical. Forward-looking firms will read the handwriting on the wall and assess the general directions in which regulation is going.

Firms that fail to plan ahead may be subject to business and operational damage as a result of the sweeping regulatory, marketplace and competitive tsunami that is transforming the industry. In light of the complexities and constant change in our industry, virtually every firm has the opportunity to take risk management to the next level.

While regulated fund managers are no strangers to managing risk in order to meet increasingly stringent regulatory requirements, virtually every firm has the opportunity to take risk management to the next level. By understanding how things are done, providing the resources needed to mitigate risk, and rewarding operations staff for their successful efforts, these managers can stay competitive, and meet the evolving needs of regulators and their investors.

For the complete guide of SEI’s Top Ten Operational Risks, go to www.seic.com/OpRisks.

Contact SEI:

London, UK

Time and Life Building

1 Bruton Street

London W1J 6TL

United Kingdom

Dan Petrovic: 44 20 7518 6323

Dublin, Ireland

Styne House

Upper Hatch Street

Dublin 2


David Morrissey: 353 1 638 2620

Oaks, US

1 Freedom Valley Drive

Oaks, PA 19456


Jay Cipriano: 001 610 676 1270