Hedge Funds Use a Mix of Compliance Technologies: Smallest funds now have low-cost ASP options | Compliance in the Real World Hedge Fund Case Studies | Hedge Fund Registration: Last-Minute Advice From an Expert | Avoiding Registration: Limits of the Lockup Loophole | The SEC Exam: Where the Rubber Meets The Road - or Not |
Compliance in the Real World Hedge Fund Case Studies
January 1, 2006
Hedge funds are among the most varied of investments, pursuing an ever-growing number of strategies even as their assets have multiplied. Hedge funds are also taking different approaches to compliance: some are already registered and just need to get up to speed with newer rules and regulations, such as e-mail archiving. Others are registered abroad, and need to bring their procedures in line with U.S. requirements. Still others, registering for the first time, will have to scramble to finish before the February 2006 Securities and Exchange Commission deadline. Following are case studies of four hedge funds, each representing a different path to compliance Due to restrictive hedge fund communication policies, we regret that we are unable to use their real names.
Case Study Number One:
At Vanilla Hedge Fund, practice makes perfect
Vanilla Hedge Fund came to Kate Dressel, president of Strategic Compliance Solutions, in January of this year. Vanilla's president knew Dressel personally, back when she worked at a hedge fund herself. So when he starting thinking about SEC registration, he called her.
Although the Connecticut fund is not one of her biggest clients--it has only nine employees--Vanilla was in pretty good shape, Dressel says. They were using best practices internally and even had a compliance manual. "They were a little more proactive in addressing the registration issue," she says.
By comparison, some of her other hedge fund customers still hadn't started working on registration documents as of mid-October. She had to call and remind them that they should start no later than Nov. 1 in order to make the deadline.
Despite Vanilla's head start, it still took until August for the fund to file its paperwork. "The compliance manual was a good effort but was not going to be enough to meet the SEC registration requirements," Dressel says. For example, Vanilla didn't have a code of ethics or a set of written supervisory procedures in place. And there were things that the fund was doing right but had never put in writing. "With SEC registration, you have to put everything in writing," she explains.
Dressel was brought in to look at the whole office. She tracked which employee was doing what, and she produced a report about what was missing and what needed to be beefed up. Fortunately, there were no gaping holes.
Only one significant change was needed: Employees would now have to document their actions. "They were a good firm," Dressel says. "They were trying to do it right in the first place."
Vanilla produced anti-money-laundering (AML) policies and procedures and educated its employees about them. It also needed an employee manual to go with the policies and procedures of SEC registration. With the code of ethics and the supervisory procedures in place, the compliance manual was complete. "The thing that was nice, that they approached very well, is that they put a lot of emphasis on training," Dressel says. "With the supervisory procedures, the code of ethics, AML policies and procedures, they did pretty extensive training for employees. The supervisory procedures--things that are required like proxy voting, personal trading by employees, client complaints, conflicts of interest--were written as how-tos so there was no question in anyone's mind about what needed to be done and when."