Chaos At The Intersection Of Marketing And Compliance - Part I

Sunday, October 1, 2006 - 01:00

This two-part series explores how 'chaos' affects various industries and what is being done to turn anarchy into order. Part one focuses on the mutual fund industry in the Sarbanes-Oxley era, while part two will discuss how the insurance, healthcare, and pharmaceutical industries are also facing - and responding to - the perils of reporting information in a timely, organized, and cost-efficient manner.

Mutual Fund Reporting - An Implosion Waiting To Happen?

In the Sarbanes-Oxley era, mutual fund managers find little time for sleep when their compliance processes are still based on linear models for fund reporting, using file sharing and archaic publishing practices.

Do existing software and workflow tools really help fund complexes satisfy the government's disclosure and timing requirements, or do they create additional headaches and costs during reporting periods? Do these same tools provide the best choice for addressing internal demands while allowing all those involved to collaboratively create, edit, proof, publish and distribute - all from any computer and in real-time?

The post-Enron era has ushered in a wave of unprecedented government scrutiny. Sarbanes-Oxley (SOX) and its progeny have led to stringent accountability standards, as well as tough criminal penalties. Working together, a wide range of government agencies have responded to the public outcry against both real and perceived investment fraud.

This, in turn, has been followed by a wave of consultants who have sprung up to advise how best to circumnavigate the complex regulatory minefield. Despite the availability of these new resources, if you are a senior mutual fund executive subject to enhanced reporting and disclosure requirements, the perils of your fund reporting workflow may still prove to be the most hazardous landscape of all.

Dealing With Compressed Disclosure Requirements

Today's fund companies all face a monumental set of challenges:

  • How to collect, assimilate, digest, communicate and distribute the huge amount of diverse performance and investment information?
  • How to do it in a systematic way that meets the tough new compliance standards and takes into account the highly collaborative nature of the task?
  • How to accomplish this Herculean feat under probing government scrutiny?
  • In 2002, the SEC proposed new regulations that would drastically increase annual and quarterly report filing requirements. Saddled with traditional workflow processes, the costs for companies to comply with the new time frames skyrocketed.

    In 2004, mutual fund companies suddenly found they were also on the firing line. In addition to annual and semi-annual reports, mutual funds companies were then required to publish quarterly holdings data more frequently. They also faced a host of other pressures, including:

  • Staying competitive on every level
  • Delivering compelling messages that sold products but satisfied regulators
  • Driving down costs
  • Streamlining labor-intensive operations
  • Maintaining and improving internal controls
  • Accomplishing these goals with fewer, and often less-experienced, personnel.
  • Why Chaos Is The Real Enemy

    Although meeting government-imposed filing deadlines is difficult under even the best of circumstances, it is increasingly the infrastructure and workflow process in place within a mutual fund that represents the greater challenge.

    These complexes are required to publish documentation that must be disseminated, reviewed and distributed to multiple internal and external groups. Mutual fund reporting is generally 'chaos on steroids' because a typical fund family needs to produce prospectuses, shareholder reports and related materials for virtually every fund and class of shares it offers to shareholders. This typically means dealing with many vendors, as well as endless rounds of comments, manual edits and approval cycles involving multiple internal departments, and a variety of software applications. It is clearly a system designed to address regulatory requirements, but which leads to inconsistencies, inaccuracies and high labor costs.

    Often, this approach may not satisfy the sprit of the requirements spelled out in the SOX certification. Not only is the current workflow process incredibly inefficient and cumbersome, it is also costly and risky from the auditing 'paper trail' perspective.

    Fund companies look to their counsel or outside vendors for key pieces of compliance information. This search process can prolong the audit and reporting process. Additionally, the manual process also makes it almost impossible to ensure consistency of data.

    A Light At The End Of The Tunnel?

    Faced with this gap between processes and regulatory requirements, an increasing number of mutual fund companies have realized that they need a better solution. Fortunately, innovative software has been developed that can cost-effectively satisfy the government's disclosure and timing requirements, while simultaneously addressing internal demands.

    The best models use web-access software that allows company-wide personnel to collaboratively create, edit, proof, publish and distribute - from any computer - in real-time.

    The new business model offers a more streamlined process of improved control and reliability for core communications. It is also clear and straightforward.

    Lawyers, accountants and their clients can all abandon the traditional manual serial process for creating drafts and replace it with web-based collaborative software that generates instantaneous proofs - for print, web and EDGARized for the SEC:

    1. Data in a content library is made available to the user for editing, review and placement.

    2. Documents are managed online in context based on their output, yet common data is shared across output styles.

    3. When a common component is modified, all related modifications are made - without the user having to edit multiple documents.

    It Is All About Change

    Buying the right software is only the initial step. The real challenge is to successfully manage the critical organizational and behavioral changes that are necessary to meet the overall fund complex's business objectives.

    That means departments must work together to understand their current processes so that they can transition effectively to the new, more automated process for publishing compliance and marketing documents.

    1. Final output from these online tools is able to take several forms simultaneously - print-ready, web-ready, EDGAR, XML, HTML, Word and Excel.

    2. Once the document is approved, it does not change further, although library components continue to evolve. Future versions of documents take advantage of the evolved components, yet previously approved versions remain unchanged.

    Whatever managers decide for technology investments, there is no doubt that intelligent change to meet this growing challenge is a question of 'when' and not 'if.' Relying on traditional means to collect and publish financial information is no longer sufficient. Ultimately, the move to automating data through a dynamic web access approach is certain to mark a fundamental change in the fund industry.

    Dave Curran , CEO of Data Communique International, is a lawyer and business leader who works to develop and implement technology solutions for compliance and marketing communications.

    Please email the author at dcurran@datacom-usa.comwith questions about this article.