Social Media, Insider Trading Top Issues in Compliance Testing

Since last year, compliance testing for pay-to-play has also increased , according to the survey of 555 compliance professionals. “The survey results reflect what ACA consultants have seen in practice: continued emphasis on testing, increased attention on compliance with the SEC’s pay-to-play rule and social media, and proactive reviews of performance claims,” said Lynne Carreiro, ACA Compliance Group senior principal consultant.

Eighty percent of RIAs have adopted formal, written social media policies, up from 64% in 2011 and 43% in 2010. Nearly three quarters, 74%, test to detect insider trading, and more than 30% have increased testing for insider trading since last year. Another key area is making sure that performance advertising and marketing is compliant (among 26% of firms), and that valuations are accurate (25%).

More than half (54%) of firms use automated/electronic compliance systems, checking most commonly for personal trading (68% of respondents), client guidelines (42%), gifts and entertainment (33%), pay-to-play (31%) and portfolio management (31%).

Fewer than half, 43%, of the RIAs surveyed comply with the voluntary global investment performance standards (GIPS), and among that firms that are not GIPS-compliant, 31% use a third party to verify their firm’s performance presentations. The survey noted that the CFA Institute determined not to mandate GIPS verifications.

Best execution remains a major concern, with 82% of firms checking for best execution—most commonly for review of: timeliness of execution and settlement (76%), trade errors (53%), review of an approved broker/dealer list (52%), comparisons to benchmarks (45%) and soft dollars and commission-sharing arrangements (41%). However, “given the issues which have arisen with regard to foreign exchange (FX) best execution, only 17% of respondents include FX transactions in their review,” the survey noted. Additionally, only 23% of firms use crossing networks.

Finally, 91% of RIAs use a third-party service provider, with the most common functions being: attorneys (85%), e-mail archival vendors (81%), auditors (75%), independent qualified custodians (71%) and information technology companies (65%).

The Investment Management Compliance Testing Survey, now in its seventh year, was conducted by the Investment Adviser Association, ACA Compliance Group and Old Mutual Asset Management.