Risk management, compliance and legal oversight: the "hidden" investment management advantage
When assessing the strength of an investment manager, most people focus on investment performance, product strategy and the breadth and depth of a firm’s sales and marketing groups. And for good reason, since without these core competencies an investment manager will have a hard time attracting or retaining clients. But another set of disciplines that is also important to helping investors reach their goals — consistently over the long run — often gets less attention.
At Nuveen, we believe informed, dedicated and focused Risk Management, Compliance and Legal teams are essential to being a premier global asset manager. These teams must be smart partners to investment, product and distribution professionals. That means being not only “safe hands” and strategic counselors, but also acting as creators of efficiency.
While these functions are obviously critical for reputation management, we think they also help drive results for clients. Among other important functions, these teams help manage the downside to “win by not losing,” and their analyses can also help generate alpha. It’s for these reasons that Nuveen is highly focused on investing in these areas of our business and making sure that their actions are fully integrated into our investment processes.
How does this work in practice? Before outlining how Nuveen’s individual Risk, Compliance and Legal teams contribute to our firm’s results, we’ll explain our philosophy behind our clientoriented culture.
These teams help manage the downside to “win by not losing,” and their analyses can also help generate alpha.
A client focus means a compliance focus
Nuveen works hard to cultivate a complianceminded culture, where all employees put our clients first when engaging in any business practice. All of our policies, training and monitoring are geared toward that effort. Everyone at Nuveen plays a part, beginning with the tone set by the organization’s top leaders. Simply put: We all own our reputation.
Nuveen maintains a three-lines-of-defense model to ensure best practices:
- First line: Every employee in our investment teams, product teams and distribution teams has a duty to supervise and follow our rigorous internal compliance guidelines. These guidelines are clearly articulated and updated regularly, and all employees are required to undergo annual compliance training.
- Second line: Our Risk Management and Compliance teams, with guidance from Legal, assist in identifying and mitigating risks (current and prospective) that may raise potential red flags. These teams monitor ongoing risks and report potential issues to senior management
- Third line: Nuveen has a dedicated Audit function that provides information to our management groups on the adequacy and effectiveness of processes for managing risk. And this process also assesses the effectiveness of the first and second lines of defense.
All three lines of defense are critical to meet our clients’ goals and ensure that our investment processes are taking appropriate, informed risks.
It is this second line of defense, however, that warrants more discussion, since these areas are often “invisible” or poorly understood by clients of investment managers.
At Nuveen, these three groups overlap, offering complementary skills. This is recognized in Nuveen’s organizational structure, as all three groups report to the Chief Oversight and Advocacy Officer. In brief: Risk Management provides a risk framework for all types of risks; Compliance is a specialized team focused on understanding and monitoring investment risk; and Legal plays an advisory role, helping to interpret laws and operating within the broader risk appetite of Nuveen.
The second line of defense monitors ongoing risks
Risk management: weighing the trade-offs
Each investment and business decision Nuveen makes has a risk and reward trade-off. Our Risk Management team helps our firm establish the standard for how Nuveen thinks — whether we decide to mitigate or accept those risks — and develops the proper governance and reporting processes. Risk Management ultimately defends Nuveen’s reputation and that of our clients — reducing reputational risk by managing a variety of other risks:
- Investment risk management ensures that investment strategies are consistent with our clients’ expectations. The Risk Management team monitors for style drift, making sure portfolio managers are not deviating from the strategy set forth in a prospectus or client guidelines. At a higher level, the team calculates risk measures that describe how investment strategies are positioned and provides the information to portfolio managers. At yet at even a higher level, the team may challenge portfolio managers about certain over/underweights in sectors or securities. In other words, our investment risk oversight helps ensure that clients who hire us are getting the investment process they are looking for.
- Operational risk oversight helps to avoid potential errors that can prove costly to the firm or harm our reputation with clients. These programs include business continuity, cyber security, supplier risk management, model risk management and issues and incident reporting. These are the sorts of issues we hope we never face, and our operational risk approaches help avoid that possibility.
- Valuation services are another part of our Risk Management work. These efforts accurately value both public and private assets across the firm. For public securities across the Nuveen fund complex, the team manages valuation policy and verifies the accuracy of vendor-provided prices. The team will provide model-based prices for securities where vendors cannot cover them accurately. For private assets, the team oversees valuation policy and, for most assets, manages the appraisal process. This work helps ensure that the prices we are paying for specific investments in client portfolios are accurate and fairly valued.
Overall, our Risk Management team provides broad oversight of our firm’s investment activities. If something seems out of place, this team can and should challenge decisions made at the individual level. If that outcome seems unsatisfactory, they can also escalate potential issues to a number of decision forums, such as a product committee or a fund board, where Risk Management also has a seat at the table.
Risk Management ultimately defends Nuveen’s reputation and that of our clients.
Compliance: advising and monitoring
Our Compliance team designs and administers programs that support all business activities across our platforms. This team works to ensure that Nuveen is conducting activities according to all applicable regulatory requirements, including partnering with the rest of the business, developing policies and monitoring results.
Partnering with all of Nuveen to maximize client goals: Compliance is committed to helping support Nuveen’s growth objectives, assisting with everything from designing new products to setting up a new office location. The team helps leverage shared services capabilities and captures economies of scale to deliver service to a diverse organization. Compliance is very involved in finding practical, right-sized solutions in all aspects of the go-tomarket process. Examples of how our team has done this include:
- Creating one code of ethics governing employee training in a central process and shared across all of Nuveen and TIAA.
- Focusing on incentive compensation for the sales process to ensure no conflicts of interest.
- Providing advice on how our investment and distribution teams should be organized to maximize value for our clients.
- Helping to integrate asset management expertise across our independent affiliates when warranted
In conducting these sorts of activities, Compliance works with Product Development, Investment Management, Marketing and Distribution. In launching a new investment fund, for instance, Compliance meets with Product Management and portfolio managers to discuss the fund’s structure and set up investment parameters. Once the structure is in place, Compliance establishes the proper trade-monitoring processes.
In addition, Compliance works with Marketing to integrate critical information into marketing materials. Marketing collateral and prospectuses set investor expectations for a specific risk and return profile, as an example, so Compliance must be in agreement with the investment teams.
Finally, Compliance responds to regulatory inquiries and registered representative functions and exams. And they complete quarterly due diligence questionnaires that request information about any compliance issues.
Developing and implementing firm-wide policies to help ensure compliance: In addition to these portfolio- and client-level activities, Compliance also develops and maintains policies and procedures to help ensure that activities are in line with industry best practices and regulatory requirements.
For example, Compliance works with Human Resources to develop and implement training modules on compliance-related practices such as preclearance of trades, outside business activities and client entertainment. Taking it a step further, these teams also collaborate to make managers aware of employee adherence to compliance policies as it relates to performance reviews. Together, all of these actions help ensure that, as a firm, Nuveen remains focused on helping our clients meet their investment objectives.
Monitoring to detect misinformation: Outside of these broader, strategic functions, Compliance also conducts ongoing risk assessment, investing money and time to help prevent or detect misinformation. For every account and product, Compliance identifies the investment restrictions and requirements, then monitors trading activities on a daily basis. For instance, investment fund prospectuses are very specific, containing potentially nearly 100 investment rules. Compliance helps ensure portfolio managers are executing these parameters, every day. This process contributes to Nuveen’s investment success by ensuring we are delivering the service the client expects.
If an issue arises, Compliance fulfills an independent challenge function and is not beholden to other areas of Nuveen’s business. Issue escalation programs are in place, including regular communication with senior leaders through the Nuveen Risk & Investment Compliance Committee. Leaders from Compliance and Risk Management update senior leadership quarterly regarding key issues, programs and policies, all to the express purpose of providing peace of mind for our clients.
If an issue arises, Compliance fulfills an independent challenge function.
Legal: providing advice and counsel
The Legal team provides advice and interprets the laws on a full range of issues critical to managing a large, global investment management firm, including navigating the complexities of launching a new investment fund or overseeing contractual agreements.
The Legal and Compliance teams work together closely, yet have different functions. Legal interprets the laws and Compliance ensures Nuveen is adhering to the laws as interpreted. Legal drafts disclosures, while Compliance develops the monitoring process to regularly ensure Nuveen is doing what it has pledged. Compliance looks to Legal for regulatory guidance and must understand when to escalate to Legal for an interpretation of a law or regulation.
In essence, our Legal team is a service provider, finding a balance between partnering with the rest of Nuveen’s businesses while also providing independent oversight. Legal helps the firm navigate decisions by:
- Identifying potential issues with new offerings early in the process to help ensure the viability of new products.
- Ensuring that Nuveen is managing portfolios within the law.
- Helping draft disclosures for the investment funds and execute filing prospectuses.
- Acting as an advocate, writing responses to comment letters, and connecting with trade groups.
- Interfacing with regulators via our Regulatory Affairs group, including the FSA, Federal Reserve, SEC and FINRA to manage regulatory risk.
- •Activating our federal or state Government Relations team to lobby for changes to existing laws or create new laws that will benefit Nuveen’s clients.
Our Legal team balances partnering with the rest of Nuveen’s businesses with providing independent oversight.
The Nuveen advantage: a depth of resources
Nuveen has deep expertise in the asset classes we manage, and an equally deep expertise in the Risk Management, Compliance and Legal functions that are as important. When we discuss Risk Management, Compliance and Legal functions with our clients or prospective clients, they acknowledge how critically important they are to making a choice about doing business with Nuveen. The market is very competitive, and we have found our clients want and deserve a firm with effective systems in place.
Nuveen’s Risk Management, Compliance and Legal teams serve as true partners, offering not just rules, but also valuable, practicable advice across all of an asset manager’s functions.
These teams are trusted partners to our lines of business. They are pragmatic and commercially minded, but also independent. They are good communicators and help educate the business on risks they are taking, policies, etc. — and do so with clear, readable messaging and content.
Risk Management, Compliance and Legal are important partners to the entire firm. As independent partners, they are both commercially minded and well positioned to help ensure the business operates in keeping with our corporate values and high ethical standards.
Nuveen, LLC provides investment advisory solutions through its investment specialists.