Jun 27, 2023

Despite today’s turbulent market and economic conditions, we continue to see a trend of firms investing more in compliance technology solutions. Cutter’s recent CCO Roundtable, a newly created forum for CCOs and other senior compliance professionals, provided perspectives and insights from our members on different aspects of areas in compliance where firms are actively looking at or implementing new technology.

To set the context for this discussion, Cutter recapped our findings from a compliance Benchmarking survey conducted a year ago that found clear intent among members to invest in compliance technology.

Technology Needs Beyond Investment Guideline Compliance

Historically, investment guideline compliance took up a significant portion of firms’ compliance budgets. While firms are still expending efforts in coding and testing new compliance rules in their pre-trade and post-trade compliance platforms, this area appears to have reached a level of stability in terms of the available vendor platforms, as most of today’s order management systems have been enhanced to provide reasonable investment guideline compliance capabilities.

Firms, however, are seeking to make improvements, evaluating technology solutions for other compliance functions in the following areas:

  • Managing Business Conduct
  • Regulatory Guidance and Advice
  • Compliance Program Management
  • Marketing Compliance

Managing Business Conduct: Best-of-Breed Versus Bundled Solutions

A significant portion of the discussion at the CCO Roundtable centered on the different aspects of managing business conduct, which includes the following:

  • Employee Personal Trading Compliance
  • Gifts and Entertainment
  • Outside Business Activities/Conflicts of Interest
  • Electronic Communication Surveillance
  • Trade Forensics/Surveillance

Panelists discussed the following tools that they used or were considering for managing business conduct:

  • ACA Compliance Alpha
  • FIS Protegent
  • MCO
  • Paragon Labs
  • StarCompliance
  • Confluence

Firms identified employee personal trade monitoring as the most common use case for these tools. One important differentiator for employee personal trade compliance in this context is automation through broker feeds. Firms preferred vendors that minimized manual work for their clients in managing broker feeds. They noted that vendors in this space provide good coverage for US-based brokers, but said they experienced more challenges with Canadian brokers.

Moreover, some firms said they preferred a bundled solution that caters to other aspects of compliance, such as risk assessments, information barriers, and deal review, in addition to supporting the various aspects of managing business conduct. To serve as an all-in-one solution, firms noted that many of the tools listed above offer coverage or are expanding their scope of functionality beyond personal trading compliance and into other aspects of managing business conduct.

Regulatory Reporting Remains a Patchwork of Solutions

Firms continue to face challenges in finding good solutions in the regulatory reporting area. Vendor solutions mentioned in this space are as follows:

  • FundApps Rapptr (for beneficial shareholder reporting)
  • Glass Lewis (13F reporting ─ still exploratory)
  • Newsfile Corp.
  • Proprietary semi-automated and Excel-based solutions

Regardless of the tools used, the panelists noted that regulatory reporting required significant manual effort.

The New Frontiers: AI/ChatGPT

It’s not surprising that compliance offers multiple use cases for artificial intelligence (AI), given the relative immaturity of automated solutions and preponderance of manual processes in many aspects of the work conducted within a compliance department. Cutter noted the following use cases where AI could be effectively leveraged in compliance:

  • Investment guideline compliance (translating guidelines from source documents to rules coded in the systems)
  • Conduct forensics and trade blotter review
  • Electronic communications surveillance
  • Marketing and disclosure reviews

Among the firms at the CCO Roundtable, the adoption of AI in compliance was relatively low, although they acknowledged that some vendors that they use (e.g., electronic communications surveillance tool vendors) have introduced AI ─ specifically, machine learning and more recently generative AI ─ into their products.

Although firms are actively interested in implementing AI in the investment front office and other departments, the compliance department’s broader responsibility is to provide firmwide guardrails around the adoption of such emerging technologies.

This responsibility has been particularly evident in the use of generative AI and the recent evolution of ChatGPT, which has gathered broad-based interest, along with some controversy. Compliance departments are advocating caution in the adoption of ChatGPT. One tactic the panelists discussed is to prohibit the use of ChatGPT until firms review it from a privacy and data protection perspective. Others indicated the need to go through a formal process for approving the use of ChatGPT by specifying its business purpose and use case.

What’s Next?

We expect to hear more conversations around the use of ChatGPT, AI, and compliance in the near future. Be on the lookout for Cutter’s next CCO Roundtable, where we plan to engage in those discussions. Meanwhile, we encourage you to join Cutter’s online Compliance Community to connect and collaborate with other compliance professionals.

Want to learn more? Contact us at [email protected] to discuss your compliance concerns.