Companies work to implement e-signature capabilities in wake of new NASAA policy.
By Beth Mattson-Teig
Over the past year, the Portfolio Diversifying Investments (PDI) industry has taken a big step forward in achieving straight-through processing thanks to a new policy that helps to pave the way for implementation of e-signatures and electronic processing.
“It may not be across the board, but I think we will see trades starting to flow through straight-through processing towards the end of this year and certainly in 2019,” says Seth Hertlein, vice president, Public Policy & Regulatory Affairs Counsel at FS Investments. That is welcome news to the PDI industry that has lagged behind other sectors of the financial services industry, such as mutual funds, that can complete same-day transactions rather than waiting weeks as is still the case when investing in PDI products.
The key to moving the ball forward on fully digital processing is the new statement of policy regarding the use of electronic offering documents and electronic signatures that was introduced by the North American Securities Administrators Association (NASAA) last May. “The NASAA electronic offering statement of policy was a tremendous leap forward for straight-through processing,” says Hertlein. The policy was necessary to clarify the position of state regulators on the use of e-signatures and gives companies a “green light” to make the necessary operational and IT changes, he says.
The validity of electronic signatures was established in 2000 through the Federal E-SIGN Act and state Uniform Electronic Transactions Act (UETA) laws. The SEC and FINRA also approved the use of electronic signatures and document delivery around the same time. However, questions remained relative to the position of state regulators. No state law prohibited the use of e-signatures, but state laws didn’t specifically permit it either, until now.
NASAA has helped to release some of the “logjam” that existed for the PDI industry due to the fact that there were no clear guidelines in place related to e-signatures and the use of electronic offering documents, agrees Christopher Shaw, managing director at DST Systems, a leading technology solutions provider for the financial services industry. “While we are still in the process of getting things implemented, you now have the entire industry working towards e-signature and digital document flows,” says Shaw.
Electronic document delivery is already in use at a number of PDI sponsors and financial advisory firms and continues to gain traction. In order to achieve fully digital straight-through processing, each link in the data chain — from the individual financial adviser all the way to the transfer agent — must be electronically linked. E-signatures are a key piece in that electronic processing chain, and adding those e-signature functions and capabilities requires capital investment to introduce new systems or modify existing systems. Until now, firms have been slow to make those investments without having clear guidance from the states.
Next Steps in Implementation
The industry is now in its implementation phase, but it is a mixed-bag in terms of where individual firms are at in that process. Straight-through processing impacts the broad industry, including sponsors, broker-dealers, registered investment advisers (RIAs), wirehouses, clearing houses and transfer agents. All of those various entities are evaluating the use of e-signatures and what it means for their business. “That has probably been going on for the last year, but people are at very different stages,” says Jodi Akers, who is a senior vice president of Global Client Account Servicing at LaSalle Investment Management.
Part of that disparity is due to obstacles that the industry needs to overcome to fully automate electronic order execution and straight-through trade processing. On the regulatory side, even with NASAA’s policy adoption last year, some states must take additional action to formally adopt those guidelines in their jurisdictions. Those efforts are under way, but that process does take some time. “I expect the remaining regulatory issues to be cleared up in relatively short order. The regulators are behind this,” says Hertlein.
Some firms have taken a risk-based approach and are fully using e-signatures and are moving forward to look at implementing straight-through processing. Other firms are waiting on further guidance on the states’ adoption of the NASAA statement of policy before they are comfortable moving forward, notes Akers. LaSalle is among those firms waiting for more clarity. “Once we feel the states are going to adopt this into their law, then we will be very quick to push the button to implement,” says Akers.
Overcoming IT Hurdles
A second big issue the industry needs to tackle is integration on the Alternative Investment Product (AIP) Services technology platform. Developed by the Depository Trust & Clearing Corporation (DTCC), the AIP platform links global market participants to provide one standard end-to-end process for alternative investments such as hedge funds, funds of funds, private equity, nontraded REITs, managed futures and limited partnerships.
“AIP is essentially an information conduit. It’s the plumbing that all of the trade data flows through starting with the adviser firm and going to the custodian or clearing firm to the transfer agent and ultimately to the program sponsor,” says Hertlein. Currently, AIP integration is at various stages among the different firms active in the PDI industry.
One challenge to full AIP integration is that many of the participants along the chain have their own legacy systems. “The trick is getting them all to talk to each other so that information can flow through,” notes Hertlein. Fully integrating that platform requires a significant investment in both time and money as firms develop new systems or re-engineer old systems. “With the regulatory issues largely resolved, the final obstacle for the industry to overcome is getting everyone to commit to full adoption of AIP on the same timeline,” notes Hertlein.
A key piece to AIP integration lies in the hands of broker-dealers. Broker-dealers need to update the tech piece where brokers are interfacing with the client on an iPad, laptop or other device. The electronic infrastructure that moves documents from the broker-dealer to the transfer agent already exists. It is really that front-end experience that will need to be implemented by broker-dealers or other third-party companies looking to digitize that transaction experience, adds Shaw.
The response from broker-dealers has been more mixed due to their ability to allocate the technology spend to upgrading platforms. The desire to implement is there, but it is a bigger dilemma for broker-dealers on where to allocate technology dollars, notes Shaw. Another impediment is getting the product manufacturers or sponsors to have some standardization of products. There does need to be some consistency in how those products behave operationally so that fintech companies can implement technology around that to make it work, he adds.
Working to Level the Playing Field
Companies are embracing fintech in an effort to level the playing field with competitors. “The PDI industry today is very similar to what we saw in the mutual fund industry in 1990, and we believe there is an incredible opportunity to grow this space by making it easier for an investor and an adviser to do business with these product manufacturers,” says Shaw.
Straight-through processing offers a number of benefits for both advisers and clients that include more convenience for customers and increased efficiencies. Faster trade processing means that investor capital spends less time sitting in escrow and more time invested in income-producing assets. “With straight-through processing, the client is able to own their asset quicker, but it is more the alleviation of frustration that is a huge benefit,” says Akers.
Another benefit to digital processing is fewer errors, which helps to increase execution speed and decrease costs associated with error resolution. Electronic processing also offers better information security, because there are no paper documents with sensitive client information floating around through the processing chain. There is widespread industry support in working toward a fully integrated platform, notes Akers. “The bottom line is that our industry wants to become easier to do business with,” she adds.
