Reduce risk with proactive obligation management

June 13, 2022

Asset management firms face a higher risk of noncompliance, unnecessary expenses, and reputational damage by maintaining reactive fund obligation processes.

Reactive obligation management entails using inefficient workflows, addressing risks as they arise, and conducting sporadic reviews. The converse strategy is using advanced technology to support proactive risk mitigation and continuous monitoring of all fund obligations.

While reactive processes may be the status quo in private markets, they’re quickly becoming too risky. Investors’ expectations are evolving along with the likelihood of stricter private market regulations. Firms maintaining reactive compliance programs could find themselves more likely to make a mistake, damaging their investor relationships.

Learn how Insight from Ontra enables firms to build proactive obligation management processes.

A side-by-side list of the challenges of reactive obligation management compared to the benefits of proactive obligation management

Characteristics of reactive obligation management

Reactive obligation management processes typically involve sending ad hoc questions to general counsel or outside counsel. Either way, getting answers back takes time. For firms relying on outside counsel, this process is particularly costly. Worse yet, firms with inefficient and redundant workflows might find themselves asking their GCs or outside counsel the same questions repeatedly.

Unfortunately, GCs and outside lawyers tend to have inconsistent processes for finding answers to firms’ questions. Or, when they have a workflow in place (such as referring to a compendium or spreadsheet) it’s still time-consuming and prone to human error.

Reactive compliance also involves firms not tracking obligations consistently. Firms might review fund obligations quarterly, at most, or irregularly throughout the year. This review process (or lack thereof) increases the risk of noncompliance with an affirmative obligation.

Additionally, reactive firms often rely heavily on one internal or external subject matter expert. This person might hold a wealth of knowledge regarding the firm’s investors and obligations. But the siloed nature of their expertise is detrimental to the firm’s overall compliance efforts.

Negative consequences of reactive obligation management

Reactive fund obligation management processes are inherently manual and slow. Whether firms take up in-house lawyers’ time on repetitive tasks or rely on outside counsel, this cumbersome work is costly. Firms either pull their in-house teams away from higher-value work or pay significant invoices to law firms.

When firms rely on one spreadsheet or one person, they lack a centralized point of institutional knowledge available to all stakeholders. They create a singular point of failure, and one mistake could have a sizable impact.

Firms also need to consider other potential costs of reactive processes. They could incur damages for breach of contract and harm their relationships with investors. Of equal importance is their lack of preparation for a regulatory audit. Deficiencies could lead to fines and further reputational damage.

Additionally, manual processes aren’t scalable as firms launch new funds and contract with more investors. A lack of streamlined processes could hamper expansion efforts.

Characteristics of proactive obligation management

The alternative to reactive processes is a continuous, technology-enabled compliance program. With an industry-specific solution, asset managers can implement a single source of truth for fund documents, investor obligations, and restrictions. Firms become equipped to involve all relevant stakeholders instead of relying on a single SME.

Critically, a central platform creates a self-service option. Stakeholders can find answers to questions themselves. Or, in cases in which individuals have questions for in-house lawyers, the legal department can quickly find and memorialize answers in the system, thereby reducing redundant workflows.

With regard to ongoing monitoring, an AI-driven solution can provide alerts and notifications based on programmed triggers. Coupled with real-time status updates for fund documents, stakeholders can keep track of contracts and obligations on an ongoing basis.

Benefits of proactive obligation management

An industry-specific tech solution reduces the number of manual, time-consuming, and costly tasks, replacing them with visibility and streamlined workflows. Firms gain consistent access to documents across teams, strategies, and verticals. Stakeholders can take advantage of real-time status updates, automated notifications, and robust searches.

These improvements allow firms to rely on outside counsel less, reducing that expense. They also enable in-house departments to spend less time on ad hoc requests. Instead, GCs can focus on high-value, strategic tasks, ultimately improving productivity and morale. They have more time to drive value for the firm when they aren’t bogged down by repetitive tasks.

More important than the cost of a compliance program, though, is compliance itself. Ongoing monitoring with automatic alerts greatly reduces the risk of missing an investment restriction or affirmative obligation. It’s simply easier to view the firm’s obligations and confirm compliance.

In terms of an SEC exam, a centralized platform for fund documents and compliance-related activities automatically creates an audit trail. Firms can quickly hand over documentation to the SEC to establish their contractual and regulatory compliance efforts. And, given firms’ improved efforts, they’re less likely to receive deficiencies letters or fines.

Finally, firms benefit from operational resiliency and a strong foundation to scale. A secure, centralized platform enables not only business continuity but also the ability to grow in the coming years. Managers have the technology and speed necessary to branch out into new markets and launch new strategies. They also can boost their reputation, using their tech-enabled compliance program as a selling point to conscientious investors.

Build proactive compliance processes with Insight

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