It’s every compliance department’s nightmare: the discovery of an inadvertent trade error or investment violation on an account. The potential loss from such errors is limitless and can be catastrophic.
During a recent training session at a client’s site, we used one of their rules to illustrate improvement techniques. This session revealed a coding error that caused an unauthorized investment purchase. The resulting loss exceeded six figures.
Common Coding Errors in Investment Compliance
Unfortunately, these incidents occur more often than we care to admit. Over the years, we have encountered numerous coding errors, all potentially preventable. In our investment compliance health checks, we frequently identify the following issues in rule libraries:
- Incorrect rule coding: Rules coded incorrectly can lead to unauthorized transactions.
- Lack of rule testing and documentation: Without proper testing and documentation, errors become more likely.
- Rules that drift from an account’s restrictions: Rules must align with each account’s specific restrictions.
Instituting Better Processes for Rule Library Maintenance
Most of these issues can be resolved by instituting better processes around rule library maintenance. We recommend the following approaches:
Ensure Quality-Control Checks
When launching a new fund, always ensure a quality-control check is conducted by a properly trained colleague. This helps catch any anomalies early in the process.
Proper Testing and Documentation
All new rules should be tested thoroughly using standard best practices, including extensive scenario testing. Proper documentation should be maintained to keep track of these tests and any changes made.
Bi-Annual Audits
The entire rule library should be audited on a bi-annual basis. Each account should be reviewed to ensure that all restrictions are being monitored by a rule. Each rule should be tested on that account for accuracy. A risk-based approach can be helpful, focusing on the accounts that are of most concern.
Utilize an OMS-Agnostic Tool
Whenever possible, use an OMS-agnostic tool to store all restrictions for each account. This helps maintain the linkage between the restriction and the rule, ensuring it is never lost.
TillieStar Can Help
If you are still struggling, TillieStar can help perform a health check on your rules to see if your rule library has been properly maintained. We also offer training for your team on maintaining your rule library effectively.
By focusing on these best practices, chief compliance officers, chief operating officers, and chief technical officers can minimize the risk of costly rule coding errors. Investing time and resources into these preventive measures will safeguard your organization from potential financial disaster.
For any questions on rule coding or to learn more about how TillieStar can support your organization, please contact us at sales@tilliestar.com or (617) 865-3550. Explore our services and insights tailored specifically for the asset management industry.
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