Over the past decade, the SEC has noted a significant 108% increase in regulatory assets managed by registered investment advisers, marking 14 years of continuous growth through 2023.
According to Moody’s, this surge has brought about a proportional escalation in SEC scrutiny, particularly targeting broker-dealers and investment advisers for their anti-money laundering (AML) practices and third-party provider oversight.
In fiscal year 2023, the SEC set a new precedent by issuing 784 enforcement actions, a 3% uptick from the previous year, accruing over $5bn in penalties and repayments. A notable 501 of these were standalone actions focused on investment adviser and broker-dealer misconduct, private funds, and insider trading, highlighting a growing regulatory focus.
Asset managers are now under pressure to amplify their risk management frameworks in response to this increased enforcement. Essential areas of concern include AML compliance, oversight of private fund advisers, and third-party risk management. The industry faces persistent challenges in compliance and customer identification programs (CIP), with many still grappling with adhering to evolving regulatory demands.
Asset managers can fortify their compliance frameworks by taking several crucial steps:
- Clarifying Compliance Scope: It begins with a clear understanding of customer definitions versus accounts under CIP regulations, vital for distinguishing between customers and mere accounts during regulatory assessments.
- Implementing a Risk-Based Approach: This involves tailoring AML programs to the unique risk profiles presented by different products, services, and customer demographics, including the examination of geographic risks.
- Establishing Adaptable Processes: Developing a compliance strategy that is both reasonable and adaptable is key to accommodating evolving business models and risk landscapes.
- Addressing Private Fund Risks: Systems should be in place for reporting suspicious activities and complying with AML regulations within private funds to mitigate emerging risks.
- Customising Policies and Procedures: Asset managers should tailor their compliance measures to fit their specific operational needs, ensuring processes are clear and well-documented to mitigate risks effectively.
- Leveraging Automated Tools and Technologies: Utilising RegTech and AI for tasks like onboarding, SAR monitoring, and risk assessments can streamline operations and reduce human error.
- Mitigating Sanctions and Fraud Risks: Ensuring investments and operations comply with sanctions and establishing robust whistleblower and fraud-prevention programs are crucial.
- Promoting Ongoing Training and a Compliance Culture: Implementing practical, scenario-based training and fostering a compliance-first culture within the organization are essential to manage complex regulatory requirements.
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