From a ‘plain vanilla’ exercise to a highly complex compliance monitoring framework: Some practical challenges in investment compliance

Abstract

The paper analyses the evolution of investment compliance over the past 15 years, since the Financial Crisis of 2008, and its transformation from a ‘plain vanilla’ task to a highly complex monitoring framework. The paper attempts to identify the roots for this transformation and comes to conclusions that are not intuitive. It further analyses the investment policies used in the sales prospectuses of the investment funds and elaborates patterns for those policies. The analysis suggests that it is appropriate to divide the patterns into two basic concepts: The ‘investment concept’ and the ‘exposure concept’. While the former seemed to fully dominate the market 15 years ago, the transformation to the new concept appears to progress at an accelerated pace. This is due to the increased complexity of the investment policies of funds and of the financial instruments that have been created by the financial market participants, as well as investment strategies employed by the portfolio managers, which cannot be properly encompassed by the old concept any longer. Participation in the creditor committees is an event that is obvious for the portfolio managers but may present fundamental legal concerns. Already, participation in such committees is doubtful for the funds that are prohibited from exercising a significant influence on their investment targets, such as undertakings for collective investment in transferable securities. An additional question that emerges when participating in such committees, and one which is analysed in this paper, is the question on the allocation of costs, the answer to which is rather art than science.