Author: Jen Gambarini
Dodd-Frank turned five years old this summer. Although many may celebrate the idea we’ve reached the end of its awkward toddler stage – the constant unknowns, changes and scouring for advice on how best to cope – the next phase doesn’t look set to be much easier.
The anniversary came and went without any huge fanfare, except for the rumblings of general consensus that it still has a long way to go. According to the Dodd-Frank Progress Report from Davis Polk & Wardwell LLP published earlier this year, for example, only around three-quarters of the regulations have been finalised and implemented. We can indeed be certain that expanded guidance covering critical business functions, such as the OCIE’s Cybersecurity Examinations, will continue to have a big impact.
But that’s not to say significant progress has not been made. It has taken great changes in mindset and practice to get us this far. Mary Jo White, Chair of the Securities and Exchange Commission (SEC) took to the stage at the Managed Funds Association’s Outlook 2015 conference last month to re-affirm the positive role that registration and reporting has had in building real insight into the private fund environment, and remind us all of the importance of increasing transparency and better protecting investors.
If the last five years has been about laying the foundations and building what White called the ‘complete picture’, the next will be about acting upon it; using that data and newfound transparency to further strengthen, test and implement the regulatory framework.
White concluded her keynote address by referencing that wonderfully vague objective so loved by hedge funds the world over – creating a culture of compliance:
“… The strong compliance culture that individual private fund advisers build in carrying out their fiduciary duty is fundamental to the strength of the industry – and its ability to work with regulators, investors, and other market participants to foster a robust, resilient financial system.”
Every single fund we speak to – from start-up hedge fund to multi-strategy mega fund – is fully committed to this. Everyone agrees that strong compliance and good governance makes good business sense for them as individual funds and for the industry as a whole. The question is how to build a ‘culture’, how long will it take and how do you know when you’ve got there? The eventual answers to each will be different for every fund, but for now we simply hear the same response: ‘I don’t know’.
Reaching for cultural change
Changing a culture can take years. Unlike a mandate for having the appropriate systems in place, a culture is defined by a set of customs and values that permeates every single part of a business. It interweaves roles, values, practices, processes, attitudes, leadership and operations and everything in between. It’s incredibly difficult to define, but it’s impossible to demonstrate if you don’t.
It’s why most hedge funds are starting somewhere a little less, well, ‘big’. The SEC first puts the onus of defining a compliance program on the firm; that’s a far more achievable step, and the logical place to start.
Starting with a Compliance Program
A fund compliance program, however, still has to penetrate every single aspect of the firm’s dealings. With the SEC’s broken window policy coming into effect, funds are leaving no stone unturned (which of course is the entire point) and the integrity and transparency of pre-investment activity and information such as research – an oft overlooked area of compliance – has now come to the fore.
Funds can no longer afford for compliance at the investment research level to be an afterthought. Compliance is now an integral part of every conversation we have about optimizing research management for hedge funds. No longer will ticking boxes for operational excellence in middle and back office IT systems suffice, compliance has finally got its status as a fund-wide imperative and front-end IT, such as research management software (RMS, is getting its share of the limelight. And about time too (though not every app vendor in the IT productivity space is happy about this, but that’s a blog for another day!)
While there’s no hard and fast path for how to embed a culture of compliance into your fund’s research practices, there are a set of clearly defined rules and regulations that you need to abide by. Hedge fund RMS should adhere to a number of regulations under SEC Rule 204-2 for Investment Research and Electronic Recordkeeping, SEC Rule 206(4)-7, also known as the Compliance Rule and plenty more. For more details on research compliance must-haves, go to our compliance page.
As far as your compliance program goes at the front-end, ensuring you have the research management software in place that ensures and enforces these rules is a no brainer. And as far as culture goes, don’t underestimate the power of usability and user experience when it comes to analyst buy-in. Ensuring your processes and people maintain compliance whilst not negatively impacting performance or productivity is certainly one step in the right direction.
Keep moving
While hedge fund CCOs start to consider their methods for defining a compliance culture across the business, there’s little let-up in tactical execution and implementation. If you shorten the lens just a little, the wave of changes and rules show no sign of abating.
December sees the relief to oral-communications record keeping come to an end, new areas for cybersecurity examinations have already come to the fore and the likes of MiFid II loom on the horizon. 2016 is set to be another pivotal year for how we, as an industry, handle the increasing growing pains of compliance.
The next few years for Dodd-Frank will be about putting its learnings into practice. Difficult to anticipate exactly what that will bring, you can still do everything in your power to prepare, stay ready and be nimble enough to adapt to change when you need to.
With best practices in place you can at least be confident that you have implemented the systems and processes that lay the foundations for future compliance, and you can build on a framework that can easily adapt and grow to evolve alongside regulatory changes. Will that successfully create a culture of compliance at your fund, and one we’ll see emulated across the financial services community? Well, it’s a start.
You can view a transcript of Mary Jo White’s MFA keynote address, entitled “Five Years On: Regulation of Private Fund Advisers After Dodd-Frank”, over on the SEC website. Or for more detail on Bipsync’s approach to research management software and compliance take a look here.
