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Regulators and Investors: A One-Two Compliance Punch
August 14, 2007
Regulation remains a hot topic in part because of the explosive growth of assets under management, believed to be approaching $2 trillion. "Hedge funds are on the regulatory radar due to their increased profile and scale, and due to the realization that they are likely to play a key role in our economy for the foreseeable future," said Barclay Blair, director of the IT compliance practice at Chicago-based Kahn Consulting.
Hedge funds are feeling a different type of regulatory pressure or discipline: from institutional investors seeking transparency and accountability. So even without formal SEC oversight, many hedge funds are investing in systems to improve data and transaction management, archiving of communications, recordkeeping and risk management.
"Those solutions have become more sophisticated in their ability to filter and search, which better supports audits and internal compliance and legal efforts," said Valentine. Examples are portfolio systems for maintaining books and records, and systems for e-mail and instant message archiving.
Kahn's Blair added that hedge funds also require low-cost, high-capacity data storage systems for compliance and disaster recovery purposes. "Hedge funds manage and rely on huge volumes of complex information," he said, "so anything that can help them better manage and harness the information is a cornerstone of compliance."
Big funds are more likely to register voluntarily with the SEC, but smaller funds "need to be as concerned about compliance as large firms," said Jim Volk, chief accounting officer and chief compliance officer of Oaks, Pa.-based SEI Corp.'s investment management services division. "Because small firms tend to have compliance staff that wear multiple hats, it's even more imperative that those firms make extra efforts to keep their compliance focus."
A rule approved by the SEC on July 11 broadens its authority to go after fraudulent conduct by targeting investors in pooled investments such as hedge funds, and it does not require that the SEC demonstrate that an adviser knew that he was violating the law.
An important reason for hedge funds to voluntarily register with the SEC is to attract institutional money. Investors often insist on SEC registration, said Aite's Valentine. There are currently 1,977 investment advisers registered with the SEC who have at least one hedge fund as a client, according to SEC spokesperson John Heine.
Benefits of Registration
"Hedge funds have discovered that the institutional investors are attracted to firms that have the infrastructure and procedures to demonstrate internal controls," said Valentine. "The structure goes a long way to making these powerful clients happy. Since that's where the money is, many hedge funds stayed registered [after the court struck down the requirement]."
What's more, subscribing to a consistent regulatory framework makes it easier for investors to make comparisons among funds. "Standardized approaches to recordkeeping and reporting allow investors to independently evaluate the performance and management of an organization," said Blair.
