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Alternative Fund Managers: Don’t Just C.Y.A.

This past week, ACA Compliance Group, a leading provider of regulatory compliance solutions within the financial services industry, released the results of a recent survey: the 2015 Alternative Fund Manager Compliance Survey.

The survey included 267 participants, all hedge fund and private equity fund managers, most of which manage over $1 billion of assets (“AUM”). Approximately 89% of the participating fund managers operate (at least partly) within the United States, with 64% operating solely in the United States.

And of those 267 survey participants, approximately 83% employ full-time compliance personnel.

Why? Because compliance-related risks are ever-present within the investment management industry, particularly within the United States.

SEC Examinations are Real

These fund managers are focused on regulatory compliance because nearly 90% of them are registered with the SEC and approximately 45% have undergone an SEC examination – and because the penalties associated with violating SEC regulations are severe, for the fund manager and its responsible employees.

That said, more than 70% of those participating fund managers that have undergone an SEC examination reported having a “compliance program” as one of the primary areas of focus – the most commonly cited response of all the SEC’s areas of focus.

Unsurprisingly, a significant portion of the survey’s results pertain to the proper (or improper) obtainment of information during the investment research process. With information sources ranging from third-party data providers to industry consultants, and from expert networks to company management meetings, fund managers need to be diligent in safeguarding against analysts’ use of material non-public information (“MNPI”) during the investment process – whether it’s intentional or not. The appropriate systems and processes needed to protect against MNPI risks should be clearly spelled-out in fund managers’ compliance programs.

It’s a coin flip…

With a nearly 50/50 chance of being subject to an SEC examination, and with extremely high stakes, all fund managers should implement a comprehensive compliance program; in particular, maintaining the integrity of investment research assets should not be an afterthought.