Why Should a Big Hedge Fund Use a Compliance Consultant?

I recently attended a large hedge fund industry conference focused on legal and compliance. The attendees were at the top in their field. Many were general counsels, chief compliance officers and chief operating officers of the largest hedge funds in the country. They all gathered to hear news and updates regarding legal and compliance issues that would affect their hedge fund business directly from the top regulators that create and enforce the rules governing hedge fund management in the US. Speakers included the top officials from the SEC, both past chairpersons, as well as current heads of various SEC divisions, the US Attorney, DOJ and FBI officials.

half said no – and a good percentage of the other half said only for the occasional mock SEC audit. As a former in-house general counsel and chief compliance officer of a fund-of-funds manager, I could not fathom successfully fulfilling the requirements of my job without an essential tool in my toolbox: the outside compliance consultant. Why? The primary reason is simple: resources. When your head is down and you are doing your job on a day-to-day basis, it is very difficult – practically impossible – to stay up to date with regulatory developments, and perhaps more importantly, business best practices.

Time is Money …

All of us have limited resources in terms of time. In a nutshell, the outside compliance consultant has their ear to the ground on a full-time basis. It is his or her job to be aware of the latest regulatory developments while an in-house person focuses on the day-to-day challenges of their firm’s business. An outside compliance consultant also has the advantage of insight into how a range of firms, often a large segment of the market of peers and competitors, implement best practices. Even finding the time to attend an industry conference can be a challenge. For every in-house counsel or compliance officer that finds the time to attend, there are dozens more who may not be able to break away from their offices. The outside compliance consultant can fill in the blanks for those who cannot make it themselves, and offer help by filling in knowledge gaps. In effect, it’s almost like being in two places at once.

The second reason is efficiency. I cannot count how many times during my in-house practice that I needed to find a template for a new policy required to adapt to a change to our business activity. Or sometimes I needed to know the industry best practice for mitigating a specific conflict of interest that arose. Rather than trying to Google the right answer or attempting to guess which of my peers might have had a similar experience, I reached out to my outside compliance consultant. If they did not know the answer, they were able to poll his or her fellow consultants. The collective knowledge and the speediness of the response was invaluable.

Running the cost-benefit analysis for my firm, it was absolutely worth engaging an outside compliance consultant on an annual basis for these reasons alone. But an additional reason was to handle one-off projects or conduct ongoing regular compliance testing that in-house staff did not have the bandwidth to complete. Without an outside compliance consultant, certain projects were constantly “back-burnered.” Using a compliance consultant to supplement our full-time staff permitted my firm to clear out the backlog of compliance projects that needed to be completed.

But Quality Matters…

Not all compliance consultants are created equal. It is not enough to have an outside compliance consultant that knows the rules and that can run down a checklist. A quality consultant should get to know your business and gain a real understanding of its business risks as well as how your compliance program is designed to mitigate those risks.

A compliance consultant should work with you over the long haul (beware firms that have high turnover) and become an ongoing advisor. He or she should understand your business (and be able to understand what it is like to walk in your shoes) so that the information they provide to you is customized and relevant. No one needs additional “busy work” or to generate more paper solely to check a box.

The recommendations a compliance consultant makes and the value they add to your hedge fund business should result in less work for you and your staff, implementation of industry best practices and overall mitigated risk to your firm.

Related Content

Latest Content

Cyber Crimes – Don’t Forget to File that SAR!

  Stopping, or even slowing, the proliferation of cyber-event related criminal activities remains a chief goal in the broker-dealer and investment advisory communities. As pointed out in a 2016 advisory released by the Financial Crimes Enforcement Network (“FinCen”), “Cyber-events targeting financial institutions often constitute criminal activity and can serve as means to commit a wide range of … Continued

DOL Rule Extension to Overlap with SEC Consideration of Fiduciary Standards

Following the Department of Labor’s November 27, 2017 announcement of an 18-month extension to the existing Fiduciary Rule transition period, the industry will enter a period of further study for proper standards for disclosure or elimination of conflicted compensation arrangements. That’s a mouthful right there. The Obama administration’s March 31, 2017 implementation of various new prohibited … Continued

Schedule 13D/13F Clarity on ETF Issues

Do I need to file a 13D or 13G if my client accounts hold in excess of 5% of an ETF? Generally, no. The SEC has granted no-action relief to ETFs with respect to compliance with Section 13(d) of the Securities Exchange Act. Section 13(d) was designed to require disclosure when holders begin to accumulate … Continued

New Remedy Coming for SEC’s Custody Rule?

The SEC’s Custody Rule continues to be a common source of confusion and a landmine for noncompliance. Custodial paperwork has caused huge headaches for investment advisers, who are not a party to the agreement and may not even have a copy of the custodial new account paperwork. The issue with existing guidance is that it … Continued

SEC Issues MiFID II No-Action Relief

Some industry anxiety was assuaged on October 26 with three no-action letters that offer relief for some US regulated broker-dealers and investment advisers regarding European MiFID II regulations. The letters followed consultation with the European authorities, and are designed to address concerns that investors could lose access to valuable research. MiFID II is a series of regulations … Continued

Mailing List

Subscribe to the Ascendant Compliance email list for the latest compliance resources, conferences, ComplianceCasts™, and more.

Loading form...

Contact Us

Ascendant works together with clients to identify and assess critical needs through customized plans. If you need assistance with compliance functions, regulatory services, cybersecurity or technology tools, we’d love to speak with you.