Compliance Best Practice

Demonstrate a strong culture of compliance.

In recent years, hedge fund managers’ legal and compliance risks have greatly increased due to new regulatory burdens under Dodd-Frank. As a result, both regulators and investors are increasingly focused on fund managers’ ability to comply with the newly pertinent regulations, many of which are not clearly prescriptive and make demonstrating compliance difficult. This leaves fund managers subject to pressure from investors to keep up with continuously evolving best practices, which are typically evaluated during the operational due diligence (“ODD“) process.

 

At Bipsync, we believe the best defense is a good offense. Bipsync’s Research Management Software (RMS) provides professional investors with a powerful tool for staying ahead of shifting standards regarding data management and electronic recordkeeping, as well as communications monitoring and control.

The New Era of Regulatory Compliance Risk

Hedge fund managers are exposed to innumerable risks, from trade execution and counterparty credit risk to adverse economic and market conditions. These hazards have always existed. However, since the financial crisis of 2007–2008, both regulators and investors have become increasingly focused on how hedge fund managers mitigate them. Hedge fund managers’ risks fall into the following categories:

  • Liquidity

  • Leverage

  • Market

  • Counterparty credit

  • Operational

  • Legal and compliance

Compliance for Pre-Trade Activities

Hedge fund managers need to establish a risk management strategy that addresses “a comprehensive and integrated compliance and business practices framework,” according to the Managed Funds Association’s report, Sound Practices for Hedge Fund Managers (2009). To that end, trade execution and post-trade activities, which primarily touch middle- and back-office personnel, have received the bulk of attention to-date; however, the SEC’s “broken windows” policy should motivate funds to focus on pre-trade compliance issues, too, which have a direct impact on front-office investment professionals.

The problem is the SEC is intentionally quite vague about what’s required of hedge funds to be compliant with Dodd-Frank, particularly as it relates to pre-trade activities. Other than suggesting that fund managers should develop a “strong culture of compliance,” many of the rules aren’t clearly spelled-out; the SEC puts the onus of defining a compliance program on the firm. There are some very specific rules, though, and that’s where Bipsync comes in.

Beyond culture, Bipsync tackles many elements of Section 206 & Rule 204-2.

How Does Bipsync Help?

Under the Investment Adviser Act of 1940, Bipsync specifically covers the following elements of Section 206 & Rule 204-2:

  • Fiduciary Duties to Clients (Section 206)
    • Reasonable Basis for Recommendations
  • Substantive Prohibitions & Requirements
    • Required Compliance Program (Rule 206(4)-7)
      • Creation and Maintenance of Required Records
      • Privacy Protection of Client Information
      • Disaster Recovery / Business Continuity
  • Recordkeeping Requirements (Rule 204-2)
    • Additional Records
      • All written communication received and sent by adviser relating to:
        • Any actual or proposed recommendation or advice given
    • Recordkeeping Methods and Procedures
      • Preservation
        • Store electronic records on tamperproof media
        • Store original and duplicate copies of records in separate locations
        • Establish and maintain procedures to protect records from loss, alteration or destruction
        • Ensure electronic reproduction of a hard copy record is complete, true and legible
      • Accessibility
        • Arrange and index electronic records for easy search, retrieval and access
        • Furnish a copy or online access of records to regulators within 24 hours of request
        • Provide legible, true, and complete copies and printouts of records to regulators
        • Provide regulators with means to access, view and print records
        • Establish and maintain procedures to limit record access to authorized personnel and regulators
      • Retention
        • Records must be easily accessible for 5 year retention term from end of fiscal year of last update
        • Records must be retained in appropriate office of the Adviser for the first 2 years of retention term

Get in touch for more information on how Bipsync can help you achieve an efficient, compliant research management process

Get in touch