Compliance

The Bipsync RMS helps hedge fund managers 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.
The Compliance Report in Bipsync RMS is one of many tools designed to ease compliance burdens.
The Compliance Report in Bipsync RMS is one of many tools designed to ease compliance burdens.

At Bipsync, we believe the best defense is a good offense. Bipsync’s Research Management Software (“RMS“) platform 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.

Bipsync is first and foremost a tool to enhance the research activities of fund managers’ investment teams. However, when it comes to pre-trade investment activities – an oft-overlooked area of compliance – Bipsync helps funds to comply with many regulations and investor demands by enabling them to:

  • Provide evidence supporting due care taken under Section 206
    • Reasonable Basis for Recommendations
      • Purpose-built for the investment management industry, Bipsync serves as a centralized research database, enhancing investor productivity and fund collaboration.
  • Facilitate many requirements under SEC Rule 206(4)-7, “the Compliance Rule
    • Information Capture and Data Management
      • End-user engagement data demonstrates the efficacy of a pre-trade compliance program, not just its existence.
      • Bipsync integrates with third-party systems, allowing analysts to import notes, contacts and emails.
      • All data coming in-and-out of Bipsync is auto-logged and searchable, in an ODD-tested fashion.
    • Bipsync addresses the core data management concerns: Privacy, Availability & Security.
  • Meet many requirements under SEC Rule 204-2
    • Investment Research and Electronic Recordkeeping
      • Bipsync’s auto-logging and time-accurate versioning features, as well as its ability to integrate with existing archivers, address funds’ electronic recordkeeping needs related to the investment decision-making process.
      • For Compliance Officers, responding to a discovery request has never been faster or easier with Bipsync’s Compliance Report portal.
    • Bipsync meets SEC recordkeeping standards: Preservation, Accessibility & Retention.
The Note Version History in Bipsync RMS allows users to revert to a previous note version.
The Note Version History in Bipsync RMS allows users to access and review previous note versions.

Background

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.

The Managed Funds Association details hedge fund managers’ risks by the following categories:

  • Liquidity
  • Leverage
  • Market
  • Counterparty credit
  • Operational
  • Legal and compliance

A New Era of Regulatory Compliance Risk

Regarding legal and compliance risks, the Dodd-Frank Act of 2010 (Dodd-Frank) totally changed the landscape for hedge funds. Under Dodd-Frank, previously-exempt fund managers are required to register with the SEC under the Investment Adviser Act of 1940, greatly increasing funds’ reporting requirements and regulatory scrutiny.

As the Blackstone Group explains in its 2014 annual report:

  • “As a result of the financial crisis and highly publicized financial scandals, investors have exhibited concerns over the integrity of the U.S. financial markets and the regulatory environment in which we operate in the United States… 
  • … senior officials at the SEC have recently emphasized their intention to implement a “broken windows” policy, meaning that the SEC will pursue even the most minor violations on the theory that publicly pursuing smaller matters will reduce the prevalence of larger matters. The Director of the SEC’s Division of Enforcement has described “broken windows” as a zero tolerance policy.”

Making matters more complicated, as the Wall Street Journal explains in its article, SEC Targets Hedge Fund Compliance Officers (2014), the SEC “is increasingly looking to hold compliance officers personally liable” when there’s a compliance failure.

With all the risk management concerns facing fund managers, adhering to research management best practices shouldn’t be one of them.

Compliance Programs: Don’t Forget 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.

The Compliance Report in Bipsync RMS is one of many tools designed to ease compliance burdens.
The Compliance Report in Bipsync RMS allows users to export a selection or all of their content.

How exactly 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

For more information on how Bipsync can help you achieve an efficient, compliant research management process, get in touch. You can also sign up and get started with the Bipsync Research Management System right now.