Delay for AIFMD third-country passport extension

It looks like the EU will hold off on AIFMD third-country passport extensions until Brexit develops a clearer path.

Ugo Bassi, Director of Financial Markets, pointed towards the technical complexities and ongoing assessment period, also in light of Brexit, at a conference last week.

The Compliance Strategy Institute at its London and Paris roundtables had workshops around UCITS and AIFMD passporting post-Brexit.

An ongoing CSI task force of chief compliance, risk, operational and tech officers is creating strategies and initiatives for members to deal with their business challenges.

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Average annualized cost of cybersecurity for financial services firms $17M+

Below are a few interesting data points from the Ponemon Institute 2017 Cost of Cyber Crime Study, jointly developed with Accenture:

Notably, the average annualized cost for financial services companies is over $17M, and include evolving business models by criminals, including ransomware as a service. Information loss, such as with Equifax, represents the largest cost component with a rise from 35% to 43% year on year. PS, it is more than worth watching John Oliver’s story on Equifax, because there is so much more to it than the media reported. Also, for those of you that have frozen their credit, my favorite is Experian’s automated message telling callers that “in case you are calling regarding the Equifax debacle”, you should call them and not Experian, as “this is a different company”.

But I digress. Ponemon looked at nine security technologies (security intelligence systems, advanced identity and access governance, automation, cyber analytics, advanced perimeter controls, encryption technologies, data loss prevention, enterprise deployment of governance, risk, compliance, automated policy management) and found that most firms spend too much on the wrong ones. The Compliance Strategy Institute (CSI) in its global roundtable series NY/Boston/London/Paris had numerous CISOs and heads of IT and data participate in the workshops to better understand the data and technology needs for compliance, risk, legal and operations executives. The ongoing CSI task force around cybersecurity and technology is exploring these global themes further on an ongoing basis, alongside Compliance Solutions Strategies (CSS).

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SEC names Driscoll as Director of OCIE and moves away from “broken windows” approach

The SEC officially named Pete Driscoll the Director of the agency’s Office of Compliance Inspections and Examinations (OCIE). OCIE directs the national examination program with a risk-based approach and Driscoll has served as director since January 2017.

Chairman Clayton in a release specifically pointed out that Driscoll had advanced the use of technology to make the program more efficient and effective. Driscoll started with the Commission as an intern in 2000 and in 2016 was named OCIE’s first Chief Risk and Strategy Officer. He began his career with Ernst & Young.

Separately, in recent speeches, SEC leadership pointed out that the commission will step back from Mary Jo White’s “broken windows” approach. SEC co-director Steven Perkins according to the WSJ indicated that the size of the enforcement staff could be reduced by 7% by next fall. Commissioner Michael S. Piwowar at the Finra and Columbia University Market Structure Conference said the enforcement division will now focus more on “emerging threats”, such as cybersecurity and international large-scale fraud.

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SEC issues three no-action letters on Mifid II research provisions

Following a consultation with the European authorities, the SEC issued three no-action letters that deal with access to research and will help provide certainty on US business procedures ahead of Jan 3, 2018.

The no-action relief allows firms to comply the Mifid II research requirements in a manner that is consistent with the US federal securities laws:

– broker/dealers on a temporary basis may receive research payments from money managers in hard dollars or from advisory clients’ RPAs

– money managers may continue to aggregate orders for mutual funds and other clients

– money managers may continue to rely on an existing safe harbor when paying B/Ds for research and brokerage

Chairman Clayton in a release said the relief was designed to “reduce confusion and operational difficulties that might arise in the transition to Mifid II’s research provisions” and to “preserve investor access to research in the near term”. He also pointed out the instrumental cooperation with the European Commission and the additional guidance the EC published.

The relief is intended to give staff sufficient time to better understand the evolution of business practices after the implementation of the Mifid II research provisions.

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Risk & compliance: Aladdin generates $600m for BlackRock from 180 external clients

BlackRock highlights technology as a growth driver and with Aladdin generated $595 million in revenue from 180 external clients last year, up 13% year-on-year.

Compliance and better understand risk have fueled that growth. In 2014 at their annual “Hackathon”, the idea was born to take the product beyond the institutional client base with Aladdin Risk for Wealth Management (“ARWM”), and the product rolled out in 2016 with high demand from intermediary distribution partners.

With the acquisition of FutureAdvisor, iCapital, and iRetire, the technology investment, risk and advisory platform is growing fast.

COO Rob Goldstein describes the firm as a “start-up with enormous scale”, but said that most people, including employees, called them crazy when they first launched the Aladdin platform.

With greater data requirements and transparency requirements coming the industry’s way on Jan 1, 2018 with Mifid II, et al, technology will be the battle field du jour for some time to come.

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PWC’s Asset & Wealth Industry Predictions: Assets “double”, greater risks

PWC in its latest Asset & Wealth Management Industry whitepaper predicts assets to go from $85T to $145T in the next decade – why the authors would call it almost doubling the assets I am not sure (and I am sure plenty of firms would like to get a piece of the $25T rounding error), but let’s go with significant growth overall globally.

The report points to four (or more) main trends that will promote and challenge the business:

– Downward fee pressure by regulators and the industry (we discussed the unintended business model consequences of regulation at our CSI roundtables last month).

– Increased regulation (against commission payments) revolutionizing wealth managers’ raison d’etre.

– Technology changes will drive “quantum change across the value chain” for the “digital technology laggard” (similarly, we discussed a lot of the data and technology challenges for asset and wealth managers in NY, Boston, Paris and London, but I am not sure the industry is as far behind technologically as many make it out to be.

– Asset managers will continue to increase their involvement in trade finance, peer-to-peer lending and infrastructure to equip individuals to save for old age. An interesting thesis and I would agree with the continued innovation post-crisis for the industry with asset managers as demand-based first movers.

– A big focus on outcomes with the need to focus on core capabilities and outsource non-core functions such as tax compliance. The focus on outcomes is undisputed, along with the demand for alternatives and passive investments. However, I am not sure calling active management and growth opportunities in question is called for. True, active management has been challenged mightily since the crisis (and even before), but aside from some of the very large-cap strategies, managers have been able to continuously find value for clients and grow/sustain their businesses. More debate ahead, of course.

– People: “firms must find and develop people with new skills and adapt their employment models to nurture and retain them.” Agreed. A lot of change is under way for the industry, especially inasmuch as data gathering, securing, monitoring and analyzing is moving front and center for legal, operational, risk, compliance and business functions.

A few of the other interesting nuggets that stood out when discussing the asset and wealth management landscape, especially with its implications for compliance, legal and risk functions, are:

– Alternative asset classes will more than double in size (esp real assets, private equity and private debt)

– Managed asset penetration rates will go from 39.6% to 42.1%

– Challenges including geopolitics, Brexit, China moving to consumer-driven economy, potential US policy changes

– Highest growth rates in Asia and Latin America

– Fee pressure will rise with Mifid 2 pushing asset managers’ costs up and banning wealth managers‘ retrocession

– Brexit could cause major disruptions to the European industry

– Transparency impact with Mifid 2 and DOL Fiduciary Rule, CRS, et al

Bottom line: the industry will continue to grow, complexity will increase, and regulation and compliance will drive business models and growth.

Never boring.

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Compliance and RegTech: Paris vs London post Brexit

The Compliance Strategy Institute (CSI) last month held Executive roundtables both in London and Paris, with specific workshops and focus areas around Brexit and the possible competition from Paris and other cities vis-a-vis London in the context of Mifid 2, Brexit, FinTech and RegTech. Ongoing institute working groups are comparing notes on how to best approach the challenges and also business opportunities from a compliance, data and risk standpoint.

The recent FT discussion with the head of KKR’s Europe business around why he moved to Paris from London and what that would mean for the firm, for private equity, and for the European marketplace was instructive on a number of levels and resonated with some of the themes we discussed in NY, Boston, London and Paris (PS, I really enjoyed how KKR allows immediate contact with all its employees, as well as the video and blog work: KKR social media and video approach)

KKR’s EMEA head Johannes Huth has moved from London to Paris and is “fascinated with what’s happening in Paris” – so are we. While London remains the international hub for financial markets and investment management, other countries and regulators are ramping up to compete. The EU is leading the way – possibly globally – with Mifid 2 and the SEC, the FCA and other regulators will have to deal with this new reality. Local regulators such as the AMF have developed task forces to attract more business, in partnership with the local industry, to compete for greater market share post Brexit.

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