Hedge funds, like many of their advisory counterparts, are expected to maintain a certain code of ethics. Yet many firms struggle with employee misconduct or a lack of transparency, which can damage the firm’s overall reputation. Keeping your hedge fund compliant can go a long way in increasing trust among your clients – and your employees.
While firm managers understand the importance of maintaining their hedge fund’s compliance program, they often lack the in-house resources or expertise to execute and regularly monitor ongoing compliance processes.
In this blog, we’ll cover a broad overview of what hedge fund managers need to know about achieving and maintaining compliance with the SEC and other regulatory authorities.
Determine if you’re required to register your hedge fund with the SEC
Fact: Not all hedge funds are required to register with the Securities and Exchange Commission (SEC).
In 2010, the Dodd-Frank Act made changes to the Investment Advisers Act of 1940 which directly impacted hedge funds and their compliance programs. The changes, which were implemented in 2012, required hedge fund advisers to register with the SEC if they oversee $100 million or more in investor assets. Previously, the amount was $25 million.
If a hedge fund adviser oversees what’s considered to be a mid-sized hedge fund ($25 million to $100 million), then they are expected to be registered with state regulators.
However, it is possible that your firm may avoid filing with the SEC if you meet the private fund manager exemption criteria. You may be eligible for this exemption if:
- You’re located in the United States.
- Your AUM is under $150 million (including anything managed outside of the country).
- You only serve private fund clients.
If a hedge fund manager has even one non-private-fund client, they will not meet the criteria to be exempt from registering with the SEC.
Develop the documents needed to register your hedge fund
If you are required to register with the SEC or a state regulator, your first step towards achieving hedge fund compliance will be documentation. Some of these documents may be required upfront, while others are good to have on hand in the event of a future audit.
One of the most common? Your Form ADV.
A Form ADV is a document which must be shared with investors immediately. Hedge fund managers are required to provide a Form ADV to investors, but they can also be accessed through the Investment Advisor Public Disclosure database as well.
The Form ADV provides pertinent information including:
- Names of the owners and advisers at your firm.
- Processes followed when working with investors.
- Services and fees.
- Potential conflicts of interest.
- Disciplinary information.
- Business background of advisers.
- Educational background.
In 2011, the SEC expanded Part 1A of the Form ADV to collect additional information from hedge fund advisers, including:
- Additional information regarding the private funds they advise on.
- More data on the advisory business itself like the type of clients, advisory activities, employees, etc.
- Business practices which may create a significant conflict of interest.
- Financial industry affiliations or non-advisory activities.
Depending on who your firm is registered with, you may also be required to provide advisory contracts as well as policies and procedures manuals for ensuring compliance throughout the firm’s day-to-day operations.
Identify who will be your chief compliance officer (CCO)
While hedge fund managers may not be held to all of the same regulatory standards as RIAs, they are still expected to uphold their fiduciary duties to investors.
If you’re required to register with state regulators or the SEC, you’ll need to name someone as your designated CCO – often a high-level adviser, such as the chief executive officer (CEO), Vice President, etc. While they can maintain their other responsibilities within the firm, they will also be in charge of overseeing all of your hedge fund compliance efforts.
As the SEC and state regulators continue to identify new risks and strive to protect investors with heightened regulatory requirements, the demand for transparency within advisory firms, including hedge funds, grows stronger every year. As a result, more time and resources are needed to achieve firmwide compliance efforts and regulatory practices.
Work with an outsourced compliance consultant
Laws and regulations change regularly, making it difficult for hedge fund managers to keep up with all the moving pieces. The problem is, neglecting to follow the latest regulatory requirements can put advisers in a bad spot.
Fortunately, compliance consultants are available to help supplement and assist with the CCO’s responsibilities. Hedge fund managers can tap into the expertise of outside professionals, as well as incorporate compliance technology platforms into their tech stack. By implementing compliance technology and consultants, CCOs can be proactive in their compliance efforts, monitor and flag employee activity and easily stay on top of the latest regulatory changes.
Integrate Compliance Technology into Your Firm With Complysci
Gone are the days of excess paperwork, unorganized folders and mismanaged processes. With ComplySci’s Compliance Programs for Hedge Funds, CCOs and their teams can easily and effectively implement customized workflows based on their Code of Ethics policies to assess employee risk. With customized solutions fit to the unique requirements for hedge fund compliance, including the latest introduction of our Black Box Trading API, ComplySci is here to help you navigate the complex regulatory landscape and achieve compliance today and tomorrow.
Book your free demo today to learn how ComplySci puts hedge fund managers in control of their compliance efforts.