Although it might not necessarily be top-of-mind for a start-up manager, if they are serious about building a proper business then establishing a culture of compliance from the get-go is important.
A new hedge fund manager that is not required to register with the SEC "doesn't necessarily need to have as detailed a compliance manual as an SEC-registered investment adviser," says Brian Roberts (pictured), Senior Compliance Analyst and Hedge Fund Practice Associate for ACA Compliance Group, a leading regulatory compliance and consulting firm.
However, unregistered fund managers still owe their clients a fiduciary duty and are subject to a number of legal and regulatory requirements, including prohibitions on insider trading, restrictions on principal transactions, anti-money laundering and anti-corruption laws.
"One of the things we often hear when talking to start-ups is whether they can get a template off-the-shelf compliance manual," says Roberts. "That is something the SEC frowns upon. They don't want managers to have cookie-cutter compliance manuals; they want them to be customised to address compliance risks of the specific manager implementing the policies and procedures."
Firms like ACA Compliance Group can help managers map out all of the regulatory issues they will need to comply with, as well as describe in the compliance manual how they are going to carry out those responsibilities.
For hedge fund advisers that plan to register with the SEC, the compliance manual should include, among other things: policies and procedures covering portfolio management; filings and disclosures; custody and safeguarding of assets; maintenance of required books and records; trading, valuation, and a code of ethics.
Registered hedge fund advisers should also plan to adopt a Written Information Security Program, including an incident response plan and a business continuity plan, but as Roberts explains, these "tend to be separate documents due to the technical details they contain".
With respect to portfolio management, this section of the compliance manual might detail how the manager generates trading ideas, makes investment decisions, the types of research employees utilise, as well as how that research is retained.
According to Roberts, an adviser's filings policy should "detail what sorts of filing obligations are applicable to the firm, what type of monitoring will be in place to determine when new filing obligations arise, and who will be responsible for making those filings."
On average, hedge fund managers that plan to register with the SEC should expect a well-drafted compliance manual to take four to eight weeks to produce. Written policies and procedures have to be tailored to the individual manager because their contents will be contingent upon the manager's investment strategy and the way the manager intends to operate its business. Adopting policies that have not been customised in this way is ill advised.
"Take the valuation policy," Roberts says. "This is going to look very different for a specialist private lending strategy compared to a long/short equity strategy that trades publicly listed securities. Trading policies and procedures will also vary from manager to manager."
Finally, senior management should take care to set the compliance tone from the top down. "Having buy-in from senior management is a key part of running a hedge fund business. Having them attend trainings and remind employees of the importance of strong compliance is advisable, regardless of the size of the manager," concludes Roberts
