Mastering Compliance Complexities In Asset Management
Effectively Managing MNPI, Market Sounding and Regulatory Challenges
The asset management market is experiencing explosive growth, projected to surge from $503.36 billion in 2024 to $7.35 trillion by 2032 at a CAGR (compound annual growth rate) of 34.7%. With this rapid expansion comes increased regulatory scrutiny, making it more critical than ever to support asset managers in navigating complex compliance challenges. Ensuring they have the right tools and frameworks in place will help safeguard market integrity, mitigate risks, and sustain long-term growth.
Technology-driven compliance solutions are essential for asset managers facing increasing regulatory scrutiny. By leveraging automation and advanced monitoring tools, like StarCompliance’s (Star) SaaS-based employee compliance suite of products, firms can streamline compliance processes, reduce risks, and ensure adherence to strict regulatory expectations. Managing Material, Non–Public Information (MNPI) and market sounding is particularly challenging, requiring firms to implement effective safeguards against insider trading and conflicts of interest.
One of the most significant challenges asset managers face is handling sensitive information properly. Failure to comply with regulations can result in severe penalties, reputational damage, and legal action. With the complexity of modern financial markets, asset managers must establish comprehensive compliance frameworks to mitigate risks.
Understanding MNPI and Its Compliance Challenges
MNPI refers to any confidential information that could influence an investor’s decision to buy or sell a security if made public. MNPI can originate from various sources, including earnings reports, mergers and acquisitions, private discussions with company executives, or confidential government actions.
Regulatory bodies like the SEC, FCA and ESMA impose stringent rules to prevent insider trading and ensure market fairness.
To comply with these regulations, asset managers must:
- Implement strict policies for identifying, documenting, and handling MNPI
- Train employees to recognize MNPI and understand their legal obligations
- Establish information barriers to prevent improper sharing of sensitive data
- Maintain Insider Lists (permanent and deal related)
- Monitor employee trading activities to detect potential violations
- Report any suspected breaches to compliance teams and regulators
The complexity of managing MNPI is compounded by the need to integrate compliance measures into everyday workflows. Firms that rely on manual processes often struggle to maintain transparency and enforce controls effectively. Technology-driven solutions simplify MNPI compliance by providing automated policy enforcement, surveillance tools, and audit-ready reporting, ensuring firms stay ahead of regulatory requirements.
Market Sounding / Testing the Waters: A Critical Yet Risky Process
Market sounding is another area where asset managers must exercise caution. It involves the controlled disclosure of confidential information to potential investors before launching a financial transaction, such as a share offering or bond issuance. While market sounding helps gauge investor interest and inform pricing strategies, it also poses compliance risks if not managed properly.
To navigate these risks, asset managers must:
- Record and retain sensitive information to demonstrate compliance in case of regulatory inquiries.
- Train employees to recognize market sounding information and handle it appropriately.
- Develop clear procedures for segregating MNPI and ensuring it does not influence investment decisions.
- Enforce trading restrictions on individuals with access to market-sounding insights.
Managing market sounding manually can be cumbersome and prone to human error. Automated solutions streamline the process by automating the collection, tracking, and retention of market-sounding interactions. This ensures transparency, reduces the risk of regulatory breaches, and helps firms maintain investor trust.
Additional Compliance Burdens for Asset Managers
Beyond MNPI and market sounding, asset managers face two additional key compliance challenges, including:
1. Personal Account Dealing
Regulators expect asset managers to monitor employee trading activities to prevent conflicts of interest and potential misuse of insider information. This requires firms to:
- Pre-clear trades to ensure employees are not trading on MNPI.
- Monitor trading activity to detect suspicious transactions.
- Enforce blackout periods during sensitive corporate events.
How Star Can Help: Star automates trade pre-clearance, flags potential violations, and provides real-time monitoring, reducing compliance overhead and ensuring adherence to policies.
2. Regulatory Reporting & Audit Preparedness
Compliance teams must maintain meticulous records and submit timely reports to regulators. This includes documenting MNPI management, market sounding activities, employee trading, and conflict-of-interest mitigation efforts.
How Star Can Help: Star simplifies reporting with automated, audit-ready documentation, reducing the compliance burden on teams and improving efficiency.
Technology-driven solutions, like those from Star, streamline employee compliance processes, helping firms stay ahead of regulatory expectations while maintaining operational integrity. With the right tools in place, asset managers can focus on their investment strategies without the constant burden of compliance risks.
To learn more about Star and how we partner with asset managers and compliance teams, request a personalized demo here.
Riding the Regulatory Wave
