A lack of granular data can spell regulatory trouble for financial firms

Hank Boughner, CEO, Dynamo Software

There’s no escaping it: regulation in the financial services industry is trending upward. Financial firms’ ability to remain compliant is now deeply connected to their ability to collect, organize, and report on more granular sets of data.

As firms grow in scale and complexity, the massive amount of data they accrue becomes a two-sided coin. Their data is home to deeper levels of intelligence that can propel greater success and meet increased compliance needs—but only if they can manage it. Vast collections of disparate data sources are difficult to govern, report on, and deliver with efficiency. Unfortunately, this gap between granular data and reporting can pose serious consequences.

In August 2023, the SEC approved new rules for the regulation of private funds. According to the SEC, the final rules will require private funds to provide investors with quarterly statements detailing fund fees, expenses, and performance, a private fund advisor to obtain and distribute an annual financial statement audit of each private fund it advises, and, in connection with an advisor-led secondary transaction, an annual fairness or valuation opinion. 

Additionally, the SEC is pushing for cyber-security transparency, and now requires a disclosure of cyber-security incidents and an annual cyber-security risk strategy report. 

While the rules are designed to protect investors and ensure transparency, new regulation inevitably brings new burdens to investment firms already strapped for resources. For many, the challenge ahead feels herculean. 

US-based Dynamo Software, headquartered in Watertown, MA with offices throughout North America, EMEA, APAC, and UAE, has four key recommended actions investment firms should take now to effectively tackle the new SEC regulations:

Determine applicable rules and dates: While the rules are sweeping and likely will have impact on nearly all private investment advisors with US presence, all advisors won’t be affected in the same way. Review your investment activities to determine which apply to your firm. 

Involve your counsel and stakeholders: Understanding the full scope of the new regulations is difficult for any one party to manage alone. Involve a cross-section of internal or external counsel and stakeholders early to ensure all relevant persons understand what changes need to be made to policies, processes, and fund documents.

Key service providers: With many of the new rules intersecting data management and reporting, it is imperative to engage in conversations with fund administration, back-office providers, and any party involved in managing your data—early and often.

Close the gaps: Remaining compliant isn’t a one-time box to check. Fund advisors must develop a new level of ongoing discipline in capturing, maintaining, and circulating data and reports in an efficient, secure manner. Often, data gathering and secure document sharing pose significant process gaps for firms—and closing them should be a key long-term goal.

Dynamo’s FinTech platform for alternative investments is already equipped to support firms in complying with the new SEC regulations. Using Dynamo’s robust data management capabilities, firms can capture granular data for extraction and then configure it into customizable reports, with the added ability to automate complex calculations. With reporting a core focus of the new SEC regulations, the Dynamo solution and its tools will help clients provide the transparency and performance metrics required.

However, compliance doesn’t end with the new SEC regulations. Financial services firms must be aware of the evolving issues such as global data privacy and ESG. 

The European Union’s GDPR, the toughest privacy and security law in the world, not only affects firms operating in or who have clients within the EU, but it overlaps with other countries too. Violations can result in serious fines, and non-compliance can bring about fines of up to $22.1 million, or 4% of a company’s worldwide annual revenue. And when factoring in data privacy requirements based on the region’s specific laws, firms cannot apply a blanket strategy to a global data protection initiative, creating a significant and critically important data privacy challenge.

Dynamo recommends using outside data privacy experts, and does so in Europe, China, and the Middle East to ensure compliance worldwide.

As ESG and impact investing trends continue to develop, financial services firms must grow in their ability to measure the impact of ESG investing on the business. The SEC’s Enforcement Division regulates ESG disclosure and misconduct to ensure firms are not engaging in greenwashing—where a firm markets its claims of environmental consciousness more than it minimizes its environmental impact. In short, firms must show that their environmental actions match their words.

In Dynamo’s ESG and DEI survey report, survey recipients revealed that greenwashing is a significant global concern for both limited and general partners. Investors must balance meeting the growing demand for ESG investments with solid systems for measuring both sustainability metrics and the performance of ESG investments.

According to Preqin’s Global Alternatives Reports, the alternatives investments market is expected to grow to $23 trillion by 2026. As growth accelerates, so will regulation. Instead of thinking of SEC rules, data privacy, and ESG as more items to cross off a to-do list, fund advisors must adopt a new mindset of adaptability to regulatory changes in a dynamic environment to remain successful.

Dynamo’s platform is continuously updated with the tools and features needed to meet changing regulatory demands. The end-to-end system makes it possible for investor clients to meet increased regulatory demands while gaining a critical performance edge.

Watch Dynamo’s on-demand webinar to learn more about the SEC’s new guidelines.