The value of communications surveillance for Private Equity Firms

In common with other financial services firms, private equity managers have been forced to face the challenge of how to adhere to electronic communications (“eComms”) policies and record keeping during the pandemic. Initially, these were temporary concerns around business continuity but latterly have shifted to an apparently more permanent revision of normal working practice. Deciding what types of communication channels should be allowed, and how the resulting records are maintained and monitored has been a difficult issue for both the management and compliance teams. The challenge faced by these teams is to ensure that recordkeeping obligations are met whilst allowing the business to operate normally and to adapt and evolve in the increased usage of a wider array of communications channels, such as video and instant messaging platforms. The complexities involved in resolving such issues has inevitably attracted regulator’s interest. Recent press reports have highlighted regulatory enquiries at large investment banks over the maintenance of records and surveillance activities across both personal devices and new communication channels.

So, should private equity also be looking at using a more active communications surveillance process as part of their compliance control and governance oversight?

The current debate in regulatory circles on the adequacy of the surveillance processes performed by investment managers and brokers to detect or prevent financial crime, with a focus on market abuse may well have been viewed as of limited interest in many private equity businesses. Some PE firms may have concluded that as they have limited contact with listed companies and their investment activities are not caught by certain related regulatory requirements such as call recording, that they avoid a significant surveillance burden. This conclusion may be hard to justify to the regulator, particularly following recent warnings. Clearly, any private equity firms that do have exposure to listed companies, whether directly through portfolio investments and transactions or by the nature of investee companies’ business, will, of course need to properly document market abuse risks and perform appropriate detective controls, over such things as inside information, conflicts management and personal dealing. Such controls should include the surveillance of records, such as eComms.

More generally, however, the establishment of clear policies over acceptable eComms, the capture and maintenance of these records and a focused active surveillance are valuable tools in private equity which support compliance monitoring and demonstrate to stakeholders that the management of conflicts of interest inherent to private equity is fully controlled.

For example, the portfolio valuation process will create a range of major conflicts for many PE firms. Valuation decisions directly impact investors’ returns, the firm’s remuneration, employees’ participation (carried interest), co-investors and fund raising efforts. Valuation processes can bring in conflicting interests of different fund offerings, the involvement of external service providers (valuation agents) as well as affiliated bodies. It is vital that private equity firms can demonstrate that all key conflicts are not only identified and recorded but are properly assessed and managed in reality. A surveillance process that captures the interactions of the various parties involved in the valuation process will demonstrate that the firm is meeting its obligations to investors and effectively managing conflicts.

Other areas where surveillance of communications will add substance to compliance efforts include decisions in relation to allocations of investments between funds and co-investors, timings regarding disposal of investments, expense allocations between different bodies, management of inducements, personal account dealing risks and wider financial crime risks such as bribery and corruption (i.e. adherence to the gifts and entertainment policy) and money laundering.

Commercially available communications surveillance systems will help private equity firms address the developing challenges of record keeping across multiple channels while providing the opportunity to centrally interrogate the ingested data to meet compliance risks. Increasingly such systems permit tailored lexicons and elements of machine learning that increases relevance of alerts and the efficiency of surveillance results. Such efforts allow compliance teams to produce tangible output that address identified conflicts and provides meaningful reporting of management information to governance bodies. Regulators, such as FCA, are aware of the capabilities of such systems and their relatively low cost, and as such are less willing to accept that a surveillance solution is out of reach for any regulated firm, including PE.

In conclusion, the time when PE firms could believe that active eComms surveillance is unnecessary or disproportionate for their business has probably passed.

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Nicholai Cumbo
Surveillance Analyst

Nicholai previously held the position of Senior Risk Officer at ACA Mirabella, where he was responsible for on-boarding clients, managing relationships and reviewing clients’ investment processes, risk management processes, strategy complexity, and operational arrangements. He was responsible for compiling and submitting data for Regulatory Reporting. 

After graduating with a B.Sc. in Mathematics and Physics, he transitioned to finance, by completing a post graduate certificate in the Mechanics of Risk Management. He followed this up by sitting for the FRM and became a Certified Financial Risk Manager.

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Elizabeth Mallia
Surveillance Analyst

An awardee of the Marie Curie Actions scholarship, Elizabeth built up her data crunching and analytical skills in theoretical motor neuroscience where she investigated brain mechanisms in action initiation at the Institute of Neurology, University College London.

She transferred her skillset to financial services in 2017, where she formed part of a formidable risk team at the regulatory hosting platform, ACA Mirabella. There she held the position of Senior Risk Associate, where she concentrated on risk management for funds with model-based strategies, focusing primarily on insurance-linked security investments. As part of the same role, Elizabeth worked with a subsection of the team on consolidating and improving the surveillance framework for potential market abuse of the platform’s diverse clientele, promoting an evidence-based approach in the set-up of the framework. 

Having also previously had the opportunity to study and work at various neuro-research institutions, including Karolinska Institutet, Stockholm and Radboud UMC, Nijmegen, Elizabeth brings multi-faceted experience in breaking down complex problems to facilitate custom solutions.

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Ryan Farrugia
Surveillance Analyst

Ryan most recently held the position of Senior Risk Associate at ACA Mirabella, where he was responsible for reviewing clients’ investment processes, risk management processes, strategy complexity, and operational arrangements. He was responsible for monitoring clients’ trading activities daily, including risk/trading limits. Ryan was also involved with the creation of the Governance Risk Compliance Operations Unit within the company. 

After graduating with a Bachelors’ Degree in Commerce, a Post Graduate Certificate in Finance, and a Master’s Degree in Investment and Finance, Ryan spent over two years at APS Bank in Risk Management and Finance.

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Tim Jukes
Senior Surveillance Analyst

For the last five years, Tim held the position of Senior Compliance Consultant at ACA Mirabella overseeing a wide range of complex and large firms on the hosted platform. 

Tim began his career at Price Waterhouse in 1986, where he qualified as a Chartered Accountant. Following qualification, Tim transferred to Hong Kong, where he spent 5 years specialising in the audit of multinational trading and finance entities. Tim spent 18 months on secondment at the Hong Kong Securities and Futures Commission developing an inspection regime for asset managers and advisers. 

On returning to the UK, Tim spent 3 years at IMRO, a predecessor to the FCA, specialising in asset management supervision. Tim subsequently undertook several senior in-house compliance and finance roles across a range of start-up and large asset managers specialising in open-ended funds and, subsequently, private equity. Tim then moved into compliance consulting with Cordium and more recently spent 5 years working at ACA Mirabella overseeing a wide range of hosted clients.

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Paul Springer
Senior Surveillance Analyst

Paul held the position of Senior Compliance Consultant at ACA Mirabella, where he was responsible for monitoring some of the largest clients and most complex served by Mirabella. He is a compliance professional with 25+ years of regulatory experience. 

At ACA Mirabella, as well as implementing a compliance infrastructure at each client and conducting ongoing compliance reviews, Paul’s role encompassed oversight and review of clients’ electronic communications (employing Fingerprint) and their staff members’ personal compliance interactions (utilising Compliance ELF). 

Paul spent 5 years at the FCA (then the FSA) as the Manager of a Corporate Authorisation team, followed by approximately 20 years of compliance experience in the financial services industry. He has worked in-house and held the Compliance Officer and Money Laundering Reporting Officer roles for approximately 12 years, firstly at a broking firm which he joined at start-up, and then a hedge fund manager. Paul also spent over 3 years working at a leading compliance consultancy, providing compliance support to clients (including full-scope and sub-threshold AIFMs, investment managers and advisers).  He is a qualified Chartered Accountant.

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George Camilleri
Head of Risk & Operations

George worked at ACA Mirabella for the past six years as Head of Risk Operations and managed the Malta-based Risk Team responsible for all the Firm’s risk monitoring and regulatory reporting. 

He holds an MSc in Financial Mathematics from the University of Leeds, focusing on quantitative risk management, and a BSc in Mathematics and Physics from the University of Malta. He has also taken several short courses, including the Oxford Private Markets Certificate at the Saїd Business School.

In his free time, George volunteers for non-governmental organisations within the cultural sector in Malta, having an interest in the arts, classical music, and opera.

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Sarah Donnelly
Head of Sales

Sarah recently left ACA Mirabella, where she held the role of Head of Sales. In this role, she was focused on the company’s growth, from targeting new business opportunities to nurturing existing client relationships.

Sarah is working towards the CIPD Foundation Certificate in People Practice.

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Joe Vittoria
CEO

Joe was most recently the CEO and Founder of the Mirabella Group. During the eight years that Joe grew the Mirabella business, it became the recognised leader in regulatory hosting in the UK. As its CEO and an experienced Compliance Officer, he was responsible for ensuring regulatory compliance of Mirabella and its appointed representative clients. During his tenure at Mirabella, the firm fully and successfully complied with its regulatory obligations, which included the FCA (UK), MFSA (Malta), and the NFA/ CFTC (USA).

Mirabella conducted a thorough surveillance process across all its clients’ activities, which included over $19bn in assets under management, across over 50 investment mandates, managed by over 200 portfolio managers and traders. The investment strategies it hosted ranged from Private Equity and Real Estate to complex credit and derivative processes, with the majority in long/short equity.

Apart from his experience at Mirabella, Joe has acted as COO to other investment management firms, which included quant, debt and credit strategies. Before starting in the alternative investment management industry in 1998, Joe worked at Salomon Brothers which he joined in 1985, after graduating from Yale with a BA in Economics.