S4:E13 | The Impact of Data on Compliance Part I | Compliance In Context

Welcome back to the Compliance in Context Podcast! On today’s show, we welcome in David Scalzetti, Senior Director of Regulatory Products and Strategy at ICE, as part one of a two-part program looking at the impact of data on compliance. In the first part of our interview, David will look at how data can support your firm’s compliance program in any number of areas including portfolio management, liquidity, valuation, fund reporting. In our Headlines section, we look at Commissioner Uyeda’s second term and a recent challenge from SIFMA regarding the Department of Labor’s new “Retirement Security Rule” proposal. And finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where we look at an interesting characteristic of the American bison and what it can teach us about the upcoming busy season for compliance officers.

Show

Headlines

• Mark T. Uyeda was recently sworn in for his second term as SEC Commissioner
• SIFMA comment letter requesting DOL to withdraw “Retirement Security Rule” proposal

Interview with David Scalzetti

• How has the topic of valuation continued to evolve in the compliance space and how can data be used with valuation to enhance a firm’s compliance program?
• What are the compliance obligations associated with SEC Rule 2a-5 of the Investment Company Act?
• How can data support compliance with good faith determinations of fair value in compliance with 2a-5?
• How can data support compliance with valuation methodologies across investment strategies?
• Best practices when thinking about and establishing a valuation process
• The impact of data on liquidity and portfolio management
• Establishing a liquidity risk management program in compliance with SEC Rule 22e-4 under the Investment Company Act
• How can firms use data on liquidity to manage through volatile markets?
• How can portfolio management and liquidity data be used to substantiate compliance with the SEC Marketing Rule?

What’s On My Mind

• Understanding the American bison and how it faces adversity

Quotes

11:28 – “We’ve been a major consumer of underlying input data and analytics information. So collecting bids, and quotes, and tree data, and other information that is very useful to understanding the valuation. Historically, most clients just want the answer key. Like, you know, ‘I don’t care what the inputs are, just tell me what your good faith estimate of that fair value price is.’ But as we’ve evolved over time as an industry and the regulators have evolved, you’ve seen more and more requests from the regulators to better understand what went into that valuation and how they get comfortable using a particular valuation. When, in a lot of cases, the underlying input data could lead to a range of good faith estimates. So what we’ve noticed and what we’ve been focusing on is repurposing a lot of that input data into metadata that is useful for whether it’s an IPV team or a compliance officer or someone in regulation or reporting to better understand how that evaluation works.” – David Scalzetti

20:17 – “So backtesting is a huge piece…Being as large of a provider as we are and [with the] number of clients we have, we get a lot of challenges on our price, and more often than not the challenges are a function of being concerned about a particular valuation, but just getting some trigger events that may be completely market norm like the price moved by more than one or two percent regardless of whether that’s appropriate for what happened in the market or not. But understanding challenges and having transparency into that. And then finally, just broader transparency into market data and unchanged prices and things like that. So, again the four categories [to me] around valuation focus on methodology, backtesting, challenge, and statistics and underlying transparency and metadata.” – David Scalzetti 

35:20 – “We’ve taken a position that a lot of that input data that we have that goes into our valuation methodologies is also valuable to help solve for liquidity in a systematic and measured approach. So the way we think about liquidity and we use a fairly standard definition, it’s just the ability, to exit a position without having a significant impact on the price.” – David Scalzetti