Compliance Still Top of Mind for Many Hedge Funds

Now that Securities and Exchange Commission's hedge fund registration rule has been defeated, many hedge fund advisors are trying to determine the smartest compliance strategy.

SEI Chief Accounting and Chief Compliance Officer Jim Volk, writes in Hedge World that registration has its advantages.

"If you think it's time to put compliance on the back burner and move on to other concerns, think again," Volk writes. "Once you begin operating as a regulated entity, the stakes escalate dramatically. Serious conflicts can lurk in any dark corner, and what your employees don't know can definitely hurt you."

At stake is something more dear than profits: it's reputation. 

"Even if you escape serous sanctions, the disruption and uncertainty alone can throw your business off track for months, if not years," Volk said.

So for hedge funds that choose to remain registered as a business decision, Volk offers some tips.

First, Volk emphasized the importance of an employment-training program that is comprehensive and systematic.

Employees must understand policies and why they are important. They must also understand past conflicts so that they can easily identify those in the future. 

Similarly, staff must know what issues demand the attention of upper management. Regular training should also help keep employees aware of pending regulations that may affect operations.

Managers must constantly look for issues that might be perceived as conflicts of interest, and all policies and actions should be documented, Volk noted. All policies should also be regularly reviewed and revised. 

In many cases, registration requires a new way of thinking.

"From the industry's inception, hedge fund advisors have thrived on being entrepreneurial, agile and free-spirited. For registered advisors, it's a whole different world," Volk said.

Compliance must be a part of each business decision, not an afterthought, he believes.

"If all this starts to seem like more trouble than it's worth, remind yourself that SEC registration has a significant upside, too," he said. "Think of it as a potential competitive advantage. More and more investors are actively seeking advisors with a strong compliance culture and are using that as a key screening criterion," he wrote.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.