New York (HedgeCo.net) – In recent months, the push for increased regulation for hedge fund advisers has gained momentum. In addition to proposed legislation in both chambers of the U.S. Congress, a number of industry associations have also signaled acceptance or outright support for a more “hands on” approach to regulating the industry.
Unfortunately, many hedge funds and advisers underestimate the host of challenges a new regulatory landscape will bring.
As part of a general call for increased regulation, transparency and accountability, the current proposals will require hedge fund and other private fund advisers to register with the SEC and to develop a comprehensive and customized compliance program —a significant change some may not be ready for.
As a result, many firms will find themselves taking on a new kind of risk they may not be familiar with—compliance risk—by not being fully prepared when regulation comes. To minimize this risk, management must make the fulfilment of compliance obligations one of its top priorities. To meet these new realities, firms must recognize that registration involves more than just completing a form. Instead, they will be expected to develop, implement and test on an on-going basis a set of written policies and procedures. This is where a trusted partner can prove valuable.
The Benefits of Being Prepared
Once registration is required, many funds and their advisers will need to develop a “culture of compliance” from the ground up rather quickly—far beyond registration, firms must map out and implement compliance policies and procedures, a code of ethics, business continuity plans and more. Further, as SEC-regulated entities, fund managers can also expect to be subject to on-site examinations by the SEC, which will scrutinize each fund manager’s compliance program for adequacy and effectiveness.
While this may prove difficult for some firms—even with a probable 6 or 12 month grace period before registration is required — a wealth of benefits can accrue to those that take steps now to get ahead of the compliance curve.
For example, many investors—particularly institutional investors with stricter mandates—are already undertaking enhanced due diligence on current and potential fund managers to ensure proper controls are in place. Such moves can only be expected to grow as compliance expectations increase, and fund managers that wait or take a haphazard approach to compliance may find themselves at a competitive disadvantage when approaching potential investors.
Due to the scope of the task at hand, preparing now for hedge fund regulation could prevent a disruption of operations or reassignment of valuable resources in a scramble to become compliant against a tight deadline. Waiting to shift the resources needed to design, implement and test a compliance program could prove catastrophic in an era when many fund managers would be better served by focusing their limited resources on replacing assets lost over the past two years.
Most important, however, attacking compliance challenges now greatly increases the potential of doing the job right the first time. No one knows what form the final regulatory requirements may take. However, critical insight can be gained as regulation takes shape and regulatory bodies lay out enforcement priorities that can assist you in the development of your compliance program. Whether it’s a focus on insider trading, internal controls and risk management, transparency or other areas, where regulators shine the spotlight can significantly impact compliance strategies going forward.
A Road Map to Success
So what steps can a firm take today to get ready? For those facing a resource or expertise deficit, recognizing the need to engage a trusted partner is important.
For example, developing an effective compliance infrastructure, including a written procedures manual and a code of ethics tailored to your business, can take a significant amount of time and should be started well in advance of registration. Tapping into outside expertise can help you learn how to think like a regulatory examiner and develop firm-wide best practices well in advance of a potential SEC examination. Even appointing and training a Chief Compliance Officer—a key step in focusing your firm’s attention and skills on the task at hand—can be made easier, more efficient and provide greater peace of mind when partnering with an industry expert.
A Partner at Hand
With over 25 years of experience, NRS stands ready to guide hedge fund advisers through the changing compliance landscape, regardless of the final form new regulation takes.
As our sole focus and expertise is in compliance services, our extensive industry knowledge allows us to offer specific solutions tailored to your business and compliance needs. From our firm-wide compliance technology solutions to Investment Adviser Registration for Hedge Fund Managers to Educational Opportunities such as our compliance conferences and Professional Development training program, NRS has the solutions and expertise you need to become—and remain—compliant.
In today’s business and regulatory climate, it isn’t enough to be successful in product selection or sales alone. The most successful firms make compliance work for them by making it part of their total business plan. As the recognized experts in the industry, NRS can help you prepare for these critical changes in the regulatory and compliance landscape with the tools and services you need to meet requirements, assess risks, save money and protect your reputation.
For more hedge fund compliance information visit www.nrs-inc.com/HedgeFund
