Rule names matter. They drive your rule clarity, accuracy, and reusability. The rule name not only needs to explain the rule, but it also needs to explain the coding so that the correct rule is applied for monitoring. Different stakeholders read the name of the rule from different perspectives (e.g., a portfolio manager can view an exposure rule differently than a compliance analyst). Additionally, the rule name is not synonymous with the guideline language.
If we used the guideline language for every rule, we would lose the ability to re-use that rule for a different account. That is why rule names need to reflect the rule requirement without too much specificity but enough specificity to be clear.
It also needs to indicate how the rule is coded. What data is it using? Most stakeholders cannot understand code, so the rule name is the only thing they have to help them understand the rule. I’ve reviewed thousands of rules and have seen good rule names and bad rule names.
Bad rule names are those that do not match the coding or names that are vague and lack proper specificity. If a compliance analyst cannot understand how the rule is working, they are much more likely to create a new rule for their requirement rather than reuse an existing rule, leading to duplicate rules.
Best Practices for Rule Naming Conventions:
1. Break Your Rule Name into Two Parts:
- Short Name: A quick reference to the rule requirement, including any qualifiers.
- Long Name: A more descriptive name for stakeholders who require additional information.
Example:
- Guideline language: “The Fund may invest up to 25% of its net assets in securities of foreign issuers, which may include depositary receipts.”
- Short Name: MAX FOREIGN x% NA (ex USA)(Risk)(incl ADR).
- Long Name: Max x% invested in issuers whose country of risk is not USA, including ADRs/GDRs/EDRs.
Note that the rule is a MAX rule but it could be a MIN/MAX requirement. The word “Foreign” is the rule topic. The limit is using an x% which allows for reusing the same rule for different limits. The denominator is listed as “Net Assets”; however, if your system allows for various denominators, this may not be necessary. The “ex USA” indicates the rule excludes any holdings in the US, and the “Risk” specifies the data being used, e.g., “Country of Risk” as opposed to “Issue Country” or “Country of Domicile.”
2. Rule Categorization:
- Include a prefix in rule names that indicates the source of the rule, such as regulatory, prospectus, or client mandate.
- Example short name: PRO/SAI – MAX FOREIGN x% NA (ex USA)(Risk).
3. Breakdown by Data or Rule Topic:
- Proper categorization helps compliance analysts view and apply relevant rules, thereby preventing duplicate rules.
- Example: Replace “Foreign” with “Country” to better describe the data points being used.
4. Indicators of Rule Automation:
- Indicate whether a rule is “Fully Automated,” “Semi-Automated,” or “Manual.”
- These indicators help asset managers understand potential risks related to rule automation levels.
While there are various options for rule names that can be adapted for each organization’s needs, it is a fact across all asset managers that proper rule names lead to better rule clarity, accuracy, and reusability. Still struggling? Let us know if you need help and we can assess your situation and provide a more specific best practice for your organization’s needs.
For any questions on adapting your investment compliance strategy 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.