With a surge in insider trading investigations, asset management firms are concerned about the compliance practices of external research providers. Asset management firms go through a laborious due diligence process with their own questionnaires to conduct due diligence with broker dealers and independent research providers.
To alleviate the burden, Castine Consulting LLC, a fintech software expert, teamed up with Integrity Research Associates, a consultancy that conducts due diligence with research providers. Over 250 broker dealers and independent research providers have signed up for the new cloud-based solution that facilitates the compliance due diligence process for asset managers. Launched on Wednesday, Compliance Telescope is designed to standardize the due diligence process for asset managers and make it easier for research providers to provide information to buy-side firms.
“It’s clear that there needed to be a technology-based solution,” says Mike Mayhew, Integrity’s founder. Integrity has been helping firms do custom due diligence on their research providers for the past ten years. Smaller clients can have 50 research firms, while larger clients have 100, 200, and 500 firms. “It became too expensive for the buy side to hire us, and they wanted more control over that process, and they wanted to repeat it.”
Research providers will also benefit from the solution. Responding to multiple queries from research providers is time-consuming and slows down the process of onboarding clients.
This is when Integrity Research partnered with Castine to come up with a solution that enables the asset managers to perform due diligence. “We came up with the idea for a universal due diligence questionnaire,” which addressed about 80% of the questions, he explains.
Modeled after the “Common Application” used by students to apply to multiple colleges, 80% of the questions posed to research providers are the same. The questionnaire also allows the asset managers to ask custom questions relative to their business issues and risk concerns.
Asking the right questions
“One of the things around insider information is making sure you ask the right questions for the [asset management] firm to really pull out from them what are their policies, procedures, [and] training, and who are the different players involved,” said Robin Hodgins, Castine’s president. Hodgkins previously ran Cogent Consulting, where he developed commission management software for buy and sell-side firms. He sold those assets to BNY ConvergEx.
Once research providers fill out the questionnaire, their answers are “crowd-sourced” to all the buy-side subscribers at once, says Hodgins. “When they hit the publish button, it’s just like you sent your college application to admissions, whether it’s Seton Hall, Northeastern or Yale,” says Hodgkins. If a firm is a larger player like Blackrock or PIMCO, they will see the response at the same time as a small firm.
Asset managers are given permission by the research providers to see their responses. If a research provider answers a question wrong, it can revise the answer, which is then shared with the asset managers. If a research provider catches a mistake, it can update its answers as often as it wants.
“Whether it’s free users on the buy side or the premium users, they all get to see it,” said Hodgkins. The answers are crowd-sourced to all the asset managers.
“This has been a huge time saver for me,” says an asset manager whose firm is using Compliance Telescope. “It’s not only resources for me, it’s time that my compliance department and legal department need to be on the phone, and those resources are expensive and limited.”
The money manager has 200 vendors, including third-party research providers and brokers, and that number could grow since it also includes data providers. “You would want to get to them and find out how do you get this data.”
“If you want to make all these phone calls and do all the compliance discussions, the math is pretty daunting.” This entails having a meeting a day, taking notes at those meetings, coming up with items of concern, and documenting all of that. “By the time you are done, it takes up all the resources of an organization,” he said.
It now frees up an administrator to go through the answers to the questions, substantiate that he or she has done the review, and mine through them on a risk-based usage, said the buy-side source. “This is a great story when any regulator comes in and says, ‘What are your policies and procedures?’” said the asset manager.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio