Compliance for the Known and Unknown

Veronica Castillo shares insight with Hispanic Executive about how Invesco effectively manages a flood of recent financial regulatory changes

Hispanic Executive: How much of your time and attention have regulatory changes demanded since the Dodd-Frank Wall Street Reform and Consumer Protection Act was implemented?

Veronica Castillo: Before Dodd-Frank, I probably spent 10 percent of my time looking at proposed regulations and rule amendments. Currently, approximately 60 percent of my work is devoted to regulatory reform and addressing its impact on Invesco. Within the US, Invesco has eighteen attorneys that support our retail and institutional business and who must stay current with regulatory change. We also have legal and compliance groups and global regulatory oversight committees in all our non-US jurisdictions—and our investment professionals and business leads also spend significant time on regulatory matters.

What is the overriding strategy for preparing, implementing, and managing so many changes?

In addition to full-time legal and compliance teams, Invesco has regulatory oversight committees
that focus on significant developments in different parts of the world. When a possible change
is identified, we conduct assessments and determine as many potential impacts as possible. That requires a tremendous amount of cross-border communication and transparency that go beyond specific jurisdictions.

What have been the most complicated changes to address?

The Department of Labor’s Fiduciary Rule imposed a new fiduciary standard on broker-dealers and other investment professionals managing retirement assets on behalf of their clients. Under the rule, broker-dealers must refrain from engaging in “prohibited transactions,” which include the receipt of a financial incentive to promote one investment over another.

That created a significant obstacle for the asset management industry, including Invesco, because we rely on brokers to sell our mutual funds. Those funds, even within the same fund family, typically have varied broker fees and those variable fees are a problem for brokers under the rule.

Invesco worked tirelessly for more than a year and a half with our distribution partners to create potential solutions to manage the impact of the rule. However, its future is uncertain under the new presidential administration since its decision-makers could change course by delaying full implementation or entirely repealing the rule.

How do you address such scenarios?

We have to take a “wait and see” approach as far as the ultimate disposition of the Fiduciary Rule is concerned. Assuming it is fully implemented, Invesco will either create new share classes on more than ninety of our mutual funds or modify existing shares to help brokers level-set their own compensation. By level-setting compensation, they would be further able to comply with their fiduciary obligations as defined by the rule.

Whether it’s fully implemented or not, my view is that the effects of the rule are here to stay. That’s because it accelerated changes in the asset management industry that we have been previewing for some time, including a shift from brokerage platforms to advisory models. The preview process required asset managers and distributors to devote so much time, financial capital, and so many resources to managing the rule’s impact that it may have already permanently changed the industry.

Are there technology solutions that can help manage so many regulatory changes?

Last year, we acquired Jemstep by Invesco, a technology platform that our distribution partners can use to digitally onboard clients. Investment professionals can then create customized investment advice for them based on their financial goals and circumstances. Robo-advisors like Jemstep are part of a growing, relatively new industry that has the flexibility to develop business models that can adapt to changing regulatory landscapes. It’s exciting to be involved at the forefront of something that can potentially change the face of investment advice.

Is there a downside to the current pace of regulatory changes?

In the wake of the 2008 recession, it’s completely appropriate for the government to be looking for ways to protect investors. But it’s not clear whether the incredible technical complexity of
the changes and the expenses they have generated are commensurate with the protection and financial stability they will ultimately be able to provide. In my opinion, a slower pace could provide time to create a better balance between priorities of shareholder protection groups and the industry, and would still create regulations that effectively serve investors’ best interests.