Financial Intermediary Controls and Compliance Assessment (FICCA) Engagements Assist Funds’ Review of Intermediary’s Internal Controls

Financial intermediary relationships are complicated arrangements, demanding significant commitment from fund complexes for management and oversight. As regulatory initiatives continue to create new or expanded regulatory compliance requirements, and as intermediaries move away from holding individual broker controlled accounts on the books of fund companies in favor of aggregated “omnibus” accounts,¹ mutual fund complexes are challenging and amending their oversight procedures to ensure that intermediaries are meeting their obligations.

Intermediary Oversight

Given the financial intermediary’s direct control over and knowledge of its customers’ fund positions, mutual fund oversight often includes monitoring certain intermediary activities to ensure adherence to mutual fund regulations, contractual obligations, and compliance with the terms of fund prospectuses and statements of additional information (SAIs).

Many fund sponsors have deployed policies and procedures to review the adequacy and effectiveness of an intermediary’s compliance controls, which may include on-site examinations, certifications, receipt of transparency data, review of analytics, and questionnaires. However, some of these methods can be duplicative and inefficient for intermediaries that have agreements with multiple fund complexes.

Increased Efficiency and Transparency

Recognizing the benefits of creating a standardized way for financial intermediaries to report on the effectiveness of their control environment, a working group of ICI member firms and representatives of the four national accounting firms developed the Financial Intermediary Controls and Compliance Assessment (FICCA) in 2008. This control review calls for the omnibus account recordkeeper to engage an independent accounting firm to assess its internal controls relating to specified activities the recordkeeper performs for shareholder accounts.

The engagement is performed under attestation standards issued by the American Institute of Certified Public Accountants (AICPA). The auditor issues a report on the design and operating effectiveness of the intermediary’s compliance controls. A sample auditor’s report that might be provided under an engagement is available.

A Flexible, Efficient Framework

The FICCA framework developed by the fund industry describes multiple areas of focus where fund sponsors may seek assurance. These areas of focus include document retention and recordkeeping, transaction processing, shareholder communications, privacy protection, and anti–money laundering, among other things. A complete list of the areas of focus is available on the FICCA “matrix.”

The scope of the independent review is intended to be flexible for the intermediary completing the engagement. For example, if an omnibus firm has already obtained a third-party examination under SSAE 16, Reporting on Controls at a Service Organization (formerly SAS 70) covering certain aspects of its operations, the assessment could be used to provide assurance on those areas not covered by the SSAE 16 Report.

The intermediary also may provide the FICCA auditor’s report to all of the funds it represents, thereby reducing the need for overlapping compliance reviews by each fund complex.

Positive Feedback

“We have found the compliance assessment report very helpful. While the SSAE 16 is focused on financial controls, the compliance assessment engagement is focused on operational controls. The two reports work in concert to provide a complete picture of the control environment for an omnibus intermediary,” said Basil Fox, president of Franklin Templeton Investor Services, LLC, an affiliate of Franklin Templeton Investments, and Chair of the ICI Operations Committee.

For More Information About the FICCA

Fund, intermediary, or audit firm representatives who are interested in learning more about the framework should contact Kathleen Joaquin, ICI Chief Industry Operations Officer, at kjoaquin@ici.org or 202-326-5930; Greg Smith, ICI Senior Director of Fund Accounting, at smith@ici.org or 202-326-5851; or one of the audit firm representatives listed below.

Timothy O’Sullivan, Deloitte & Touche: tiosullivan@deloitte.com
Alan Fish, Ernst & Young: alan.fish@ey.com
Brent Oswald, KPMG: bdoswald@kpmg.com
Nick D’Angelo, PWC: nicholas.dangelo@us.pwc.com

ENDNOTES

¹Omnibus accounts are held in the name of the intermediary on a mutual fund transfer agent’s records. The intermediary maintains the underlying shareholder account information on its own recordkeeping systems—a process known as sub-accounting—and reports share transactions to the funds on an aggregate basis. The intermediary handles all communications and servicing of its customer accounts. As a result, the underlying shareholders in an omnibus account do not directly interact with the fund organization, and the fund organization may have little, if any, knowledge or limited transparency about such underlying shareholders.