NTGA Compliance & Operational Manager Due Diligence Process

Transcription

1 NORTHERN TRUST 2010 PROGRAM SOLUTIONS CONFERENCE Investment Solutions in an Uncertain World: WHAT S NEXT? NTGA Compliance & Operational Manager Due Diligence Process Allison K. Fraser VP & Sr. Compliance Officer Alena A. Karr VP, Operational Due Diligence 2010 Northern Trust Corporation northerntrust.com

2 NTGA Due Diligence Program Overview NTGA s Manager Due Diligence Program is a consistent process applied consistently for all Managers. The due diligence process is designed to evaluate Managers from 3 perspectives: Investment Research, Compliance and Operations. Analysis of investment style, process and performance Manager Research Analysis of operations, internal and risk controls Assess risk and scope of ongoing monitoring Operations External Managers Compliance Analysis of compliance program, policies and procedures Ongoing monitoring process Program Solutions Conference

3 Compliance and Operational Due Diligence Process for New Managers Initiation of Due Diligence Review Investment Research requests Compliance and Operational Due Diligence ( ODDT ) teams initiate manager review Compliance and ODDT send a combined questionnaire ( NTGA Questionnaire ) to the manager Pre-Meeting Due Diligence Compliance and ODDT review manager s response to the NTGA Questionnaire and related documents Compliance searches publicly available websites for additional information about the manager ODDT assigns manager s preliminary operational risk rating Compliance and ODDT determine approach to further review of the manager Due Diligence Meeting Investment Committee Meet or conduct a conference call with manager s key personnel across organization Discuss manager s compliance program and regulatory responsibilities ODDT discusses manager s investment operations, risk and internal control environment View demonstrations of critical systems supporting compliance, operations and risk Compliance and ODDT prepare separate written assessments of manager s compliance program and operational controls Investment Research, Compliance and ODDT submit independent reports on manager for oversight committee approval Program Solutions Conference

4 Standard Topics Addressed by Compliance and ODDT in Due Diligence Review Organizational Structure & Corporate Governance Ownership structure Corporate governance Reporting and control relationships Manager s investment process and products Business continuity and disaster recovery plans Operations and Trade Order Management Processes Trade order management process and systems Trading and cash movements policies and procedures Broker selection, execution, and commission policies and procedures Pricing and valuation policies and procedures Internal routines and controls Compliance Matters Compliance staff organization and experience Compliance program Risk assessment Compliance policies and procedures Compliance resources and systems Compliance & Operational Due Diligence Review Topics Investment Risk Oversight Risk management governance Monitoring of counterparty exposure Derivatives policies and monitoring process Internal and external audits: role, reporting, and findings Regulatory Matters Regulatory framework Regulatory exams and audits Historic and current regulatory actions Other open regulatory items Third Party Service Provider Oversight Material third party service providers Policies and procedures for outsourcing, initial due diligence and monitoring third party service providers Program Solutions Conference

5 Key Topics and Risk Considerations Key Topics for Review Topic Focus and Considerations Organizational Structure & Corporate Governance Organizational hierarchy of the firm Governing structure and committees Ownership structure and affiliates Decision making process Appropriateness of separation of duties Ability to identify conflicts of interest Effectiveness of escalation channels Appropriate oversight arrangements Investment Management Regulatory and Risk Oversight Oversight Regulatory agencies with which the manager is registered Regulatory exams and audits Regulatory history Open or pending regulatory actions Understand the manager s regulatory environment Understand the scope of regulatory exams and audits Learn what issues, deficiencies or concerns were identified by regulators and manager s resolution Understand manager s regulatory history Identify any open or pending matters which may create legal, compliance or reputational risk Human Resources Recruitment Employee training Key person risk and succession planning Resources Staff turnover Ability to attract qualified candidates Process for training employees has been established Plans have been established to address key person risk and succession planning Manager has sufficient personnel and resources for its business Program Solutions Conference

6 Key Topics and Risk Considerations (continued) Key Topics for Review Topic Focus and Considerations Compliance Program Organization of compliance staff Qualifications and experience of compliance personal Adoption and review of compliance policies Code of ethics Oversight of personal trading, outside affiliations and gifts Review and approval of marketing materials Compliance systems Third party resources Checks and balances of the manager s compliance function Knowledge and understanding of the regulatory framework in which the manager operates Process for evaluating the efficacy of the compliance program and business risks Process for reviewing policies and controls to ensure that they are current and appropriate Procedures established for the escalation of breaches of compliance policies Appropriate controls to identify real or potential conflicts of interest Use of third party to assess compliance program Finance & Accounting Financial reporting Restatement of financials Auditor qualifications and experience Explanations for restatement of financials (if applicable) Qualified opinion Independent oversight of financial accounting process Investment Management & Internal Risk Oversight Routines & Controls Investment styles and products Investment philosophy and process Performance and portfolio characteristics Investment risk oversight Firm s remuneration policy Product mix and possible conflicts of interest Experience and knowledge level of staff Appropriateness of reward structure alignment Potential conflict of interest in a side-by -side management Effectiveness of risk management and risk framework Program Solutions Conference

7 Key Topics and Risk Considerations (continued) Key Topics for Review Topic Focus and Considerations Internal Routines & Controls Trade order management process and systems Trade error policy and procedures Policies and procedures relating to trading and cash movements Trade allocation, rotation, aggregation of orders process Approved broker/dealer process Brokerage commission oversight and monitoring process Best execution process and procedures Systems access Subscription and redemption processes Internal audit s role and reporting External audit Effectiveness of trading platform for asset classes Trade order documentation Process for monitoring investment guidelines Process for ensuring clients are treated equitably and fairly Process for approving trading arrangement Authorized counterparty Monitoring of broker execution services and cost Use of third party vendors to evaluate trading Adequacy of process for affecting transactions Monitoring investment guideline compliance Oversight of trading functions by others (compliance, Audit, oversight committee) Investment Administration & Controls Trade confirmation and settlement processes and systems Cash, positions and portfolio market value reconciliation Mark to market adjustments Valuation and pricing process and policy Illiquid securities pricing and valuation Portfolio market value calculations and sign off Security lending Effectiveness of segregation of duties Knowledge and experience of staff Access level controls for confirmation process Conflict of interest in side-by-side management Adequacy of risk management and risk framework Process for valuation and pricing securities Program Solutions Conference

8 Key Topics and Risk Considerations (continued) Key Topics for Review Topic Focus and Considerations Technology & Business Continuity Plan BCP/DR policies and procedures Scope and findings of the recent tests Third party BCP oversight Process for developing and implementing BCP Frequency of testing and results Process for oversight and review of third party service providers Third Party Relationships Policies and procedures around third party vendor management Vendor initial due diligence process Third party performance monitoring and relationship management Effectiveness of due diligence process Defined scope of responsibilities and deliverables Process for monitoring vendor performance Ownership of vendor relationship by business unit or person Program Solutions Conference

9 Important Information This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. Opinions expressed are current as the date appearing in this material only and are subject to change without notice. This report is provided for informational purposes only and does not constitute investment advice or a recommendation of any security or product described herein Program Solutions Conference