Best practices call for the establishment of an investment committee equipped with sufficient knowledge and expertise to satisfy ERISA’s prudent expert standard. Such a committee must adopt and abide by an Investment Policy Statement (IPS).
The Adopting Release requires funds and investment advisers to designate a chief compliance officer (“CCO”) who will administer their Compliance Procedures and be familiar with federal securities laws (and, for investment advisers, Advisers Act). The CCO should possess knowledge about relevant laws (i.e. federal securities regulations or Advisers Act in case of investment adviser).
1. Establish a Well-Defined Process for the Evaluation of Investment Options
Investment involves the analysis, selection and management of various financial instruments or ventures with an aim of optimizing risk-adjusted returns. Although its definition varies among scholars and theorists, all agree it’s a dynamic process which continuously evolves over time.
Evaluation of investment options requires conducting an in-depth assessment of various aspects, such as your financial goals, risk tolerance and time horizon. Furthermore, an effective evaluation process must include consideration for expected returns from each investment option under consideration.
Under the new rules, registered investment companies and investment advisers must designate one chief compliance officer (CCO) to administer their Compliance Procedures. The CCO should possess expertise regarding federal securities laws (advisers Act in case of investment advisers), be empowered with full responsibility and authority to create and enforce Compliance Procedures, familiarize himself or herself with operations of all Service Providers affiliated with an investment company complex, as well as identify those aspects which expose such service provider to compliance risks for an investment company complex.
2. Establish a Well-Defined Process for Monitoring Investment Performance
Implementing an effective monitoring process is key to accurately benchmarking ROI and making informed investment decisions. Companies can ensure their investments are meeting expectations by setting clear objectives, setting KPIs, using technology, and conducting regular performance reviews of investments.
Monitoring investment performance regularly is also key to identifying issues or trends that may impair company returns, for instance if one stock in particular is performing poorly, diversifying portfolio or reallocating resources may be required to boost overall returns.
Companies can benefit greatly by regularly reviewing and analyzing investment data to assess the efficacy of their processes, making changes as needed, to help maximize financial outcomes and build confidence in investment decisions. It is also imperative that any Service Providers with whom an investment company or registered investment adviser maintains contracts have implemented effective Compliance Procedures administered by competent personnel.
3. Establish a Well-Defined Process for Monitoring the Performance of Plan Fiduciaries
An effective process for monitoring plan fiduciary performance can reduce investment risk and help committees avoid potential ERISA fiduciary liability issues. A review should encompass an in-depth examination of plan investments, policies and procedures, service providers as well as any service agreements entered into by them.
Review of fees should include an analysis of how they are calculated and whether they are reasonable; additionally, review should include evaluation of security and disaster-recovery programs in place within the plan.
Another element of an effective review should be to compare plan fees with similar plans, to help plan fiduciaries judge whether they are reasonable. Furthermore, review should include discussing any changes needed to improve fees; legal counsel should be involved as this will reduce litigation risks and ensure any technical legal issues are properly considered during discussions.
4. Establish a Well-Defined Process for Monitoring Plan Participants
Investment managers frequently serve clients from multiple countries that fall under various regulatory regimes, making compliance with regulations an ongoing task. It can be especially challenging when guidelines vary and change over time; having robust reporting and monitoring in place to manage any violations could reduce risks if such incidents do arise.
In its Adopting Release, the SEC noted its expectations that new rules would provide investors and advisers with greater clarity about the investment practices of fund companies, their board members and independent directors, while encouraging greater compliance by both investors and investment advisers alike.
Clearwater Analytics gives users the power to set custom controls that monitor compliance with investment policies as well as regulations including ESG policies. All investment activity is checked against these controls daily at both security and lot levels to quickly spot violations and resolve them promptly. Furthermore, Clearwater Analytics consolidates and reconciles your data for accounting, compliance, and performance reporting – eliminating the need for multiple systems.
