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Hedge Fund Compliance: Risks, Regulation, and Management




Hedge Fund Compliance: Risks, Regulation, and Management

Jason A. Scharfman

ISBN: 978-1-119-24026-6 November 2016 208 Pages

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The long-awaited guide for modern hedge fund compliance program development

Hedge Fund Compliance + Website provides straightforward, practical guidance toward developing a hedge fund compliance program, drawn from the author's experience training financial regulators, consulting with government entities, and analyzing hedge fund compliance structures across the globe. In-depth explanations of compliance principles are backed by illustrative case studies and examples. Highly in-demand templates of popular hedge fund compliance documentation provide actionable illustrations of key compliance policies. Designed to assist investors, fund managers, service providers, and compliance job seekers directly, this book describes the fundamental building blocks of the hedge fund compliance function.

Compliance is one of the fastest growing areas in the hedge fund space. This reference book provides an essential foundation in modern hedge fund compliance, reflecting the recent changes of this dynamic field.

  • Design and run a hedge fund compliance program
  • Access templates of core compliance documentation and checklists
  • Discover how investors can evaluate and monitor compliance programs
  • Interviews with hedge fund compliance practitioners

A steady stream of regulatory changes, combined with the enhanced enforcement efforts of regulators, ensure that hedge funds' compliance-related expenditures will continue to grow. While hedge fund compliance legislation continues to evolve globally, little practical guidance exists for those tasked with the boots-on-the-ground aspects of developing an actual compliance program to comply with best practices and regulatory guidance from leading hedge fund regulators including the US Securities and Exchange Commission, the National Futures Association, the Commodity Futures Trading Commission and the United Kingdom's Financial Conduct Authority. Hedge fund professionals and investors need a fundamental framework for establishing and evaluating an effective program, and when compliance is the issue, trial and error carries too much risk. Hedge Fund Compliance + Website provides clear guidance and practical tools to meet today's compliance professional needs.

Preface xi

CHAPTER 1 Introduction to Hedge Fund Compliance 1

Introduction 1

Differences in Hedge Fund and Other Alternative Fund Compliance 1

Hedge Fund Compliance Is Not Specific to One Country 4

Do Alternative Investments Merit Special Compliance Considerations? 5

Understanding the Hedge Fund Compliance Framework 9

Introduction to the Hedge Fund Compliance Function 10

Distinguishing the Legal and Compliance Departments 11

Key Players in Compliance 12

Standard Areas Covered by a Hedge Fund Compliance Function 14

Compliance Function Roles and Authority 16

Chapter Summary 17

Notes 17

CHAPTER 2 Introduction to Hedge Fund Regulation and Examination 18

Introduction 18

Different Types of Regulation for Different Financial Entities 18

Why Regulation Is Needed 20

Where Do Compliance Rules Come From? 22

National and Global Jurisdiction 23

Common Regulatory Interaction with Hedge Funds 24

Regulatory Examinations 25

Chapter Summary 28

Notes 28

CHAPTER 3 The Chief Compliance Officer and Regulatory Reporting 30

Introduction 30

Introducing the Chief Compliance Officer 30

Regulatory Reporting 34

Regulatory Reporting in Multiple Jurisdictions 34

Common Regulatory Reporting Questions 35

A Multistep Process 35

Chapter Summary 40

Notes 41

CHAPTER 4 In-House Compliance Professionals and Hedge Fund Committees 42

Introduction 42

Common Compliance Function Tasks 43

Firm Committees as Compliance Mechanisms 49

Chapter Summary 53

Note 54

CHAPTER 5 Hedge Fund Compliance Technology 55

Introduction 55

Understanding the Hedge Fund Information Technology Function 55

Primary Compliance Uses of Technology 58

Compliance Considerations for Use of Electronic Data 59

Compliance Oversight of Nonelectronic Data 64

Business Continuity and Disaster Recovery Planning 64

Chapter Summary 65

Notes 66

CHAPTER 6 Compliance Consultants and Other Compliance-Related Service Providers 67

Service Provider Compliance 67

Classification of Compliance Service Providers 67

Service Provider Compliance Work 68

Hedge Fund Compliance Consultants 69

Chapter Summary 82

Note 82

CHAPTER 7 Understanding Key Compliance Documentation 83

Reasons for Documenting Compliance Policies and Procedures 83

Understanding the Goals of Compliance Documentation 84

Jurisdictional Differences in Compliance Documentation 85

Understanding Boilerplate Documentation 85

Core Compliance Documentation 88

Chapter Summary 97

Note 98

CHAPTER 8 Investor Evaluation of Hedge Fund Compliance Functions 99

Introduction 99

Compliance Evaluations in Investor Due Diligence 99

Initial and Ongoing Compliance Analysis 101

Evaluating Best Practice Compliance 104

Key Compliance Analysis Areas 109

Chapter Summary 118

Note 118

CHAPTER 9 Case Studies and Example Scenarios in Hedge Fund Compliance 119

Introduction 119

Compliance Scenario 1 119

Compliance Scenario 2 122

Case Studies 123

Chapter Summary 129

Notes 129

CHAPTER 10 Common Compliance Pitfalls and How to Avoid Them 131

Introduction 131

Pitfall 1: Small Firms Build Large Firm Compliance Infrastructures 131

Pitfall 2: Underspending on Compliance 133

Pitfall 3: Lack of Independent Compliance Reporting 134

Pitfall 4: Outsourcing All Compliance 135

Pitfall 5: Relying on Technology and Compliance Automation 136

Pitfall 6: Letting Investor Opinion Drive Compliance Priorities 137

Chapter Summary 138

Notes 139

CHAPTER 11 Interviews with Compliance Service Providers 140

Introduction 140

Interview with Kent Wegrzyn (ACA Compliance Group) 140

Interview with Vinod Paul (Eze Castle Integration) 160

Chapter Summary 171

CHAPTER 12 Trends and Future Developments 172

Introduction 172

Chief Compliance Officers Personal Liability Concerns 172

Increased Senior Manager Regulatory Accountability 174

Compliance-Related Insurance 175

Increasingly Coordinated Hedge Fund Regulation in Europe 176

Chapter Summary 177

Notes 178

About the Author 181

About the Companion Website 183

Index 185