Opalesque Industry Update – Kinetic Partners, a leading regulatory consultancy to the hedge fund industry, today issued guidelines for investment advisers on how best to prepare for impending regulatory changes. |
At least 26 proposed bills this past year have focused on U.S. financial regulatory reform and it is likely that they will be consolidated and amended into a single bill called the Wall Street Reform and Consumer Protection Act of 2009, including a provision for greater regulation and transparency of most managers of privately pooled investment vehicles.
Historically, many firms have enjoyed an exemption from regulation by the SEC under the Investment Advisers Act of 1940, but changes will affect almost all hedge fund, private equity and venture capital managers that are not currently SEC registered in the very near future.
Advisers need to understand the SEC registration requirements, develop a compliance infrastructure and culture, and ensure that adequate resources and expertise are available. Unregistered advisers should conduct substantive meetings with the firm’s various departments and fund entities to assess any specific compliance weaknesses that may exist. The front office, traders (and assistants), research, operations, accounting, and risk heads need to clearly understand their roles and responsibilities within the compliance infrastructure. Advisers that are already registered with the SEC should also monitor the proposed legislation with particular attention to the potential increase in disclosure requirements.
Key components of a robust compliance program include the appointment of a chief compliance officer and preparation of a compliance manual.
In addition, firms should prepare a Risk Assessment Matrix (RAM) with clearly stated policies with respect to both perceived and actual risks. The RAM should detail how the firm will mitigate each risk in all areas of the firm, including portfolio risk, cash controls and cash transfers, insider trading, reporting errors, and client conflicts.
“While the proposed bill is still being finalized, and there is currently no confirmed timetable, it is widely expected that an amended and final version will be put before President Barack Obama before the end of the summer. If signed, there is likely to be an implementation period of 6 to 12 months. Regardless of the timetable, however, firms must ultimately be able to substantiate to the SEC their ability to maintain appropriate systems and controls. This cannot be a static process, and the planning should begin now,” said Kinetic Partners’ Member, Neil Morris.