Compliance for Hedge Funds

Terry Flanagan

Staying compliant indeed relies on the sophistication of one’s system, but mangers play a greater role than they may think.

On December 13, German financial services firm, M.M.Warburg & CO KGaA, with approximately $54 million under management selected SimCorp Dimension, an integrated portfolio management and compliance system to support its large institutional asset management business.

SimCorp’s flagship product includes front to back office solutions, ranging from portfolio management and trading tools, compliance, risk management/reporting and accounting. As the regulatory landscape continues to constantly evolve and put pressure on asset managers to keep up, reliance on an automated, one-stop-shop solutions provider has soared.

Yet, the implications of financial reform also should put pressure on a chief compliance officer, especially regarding the convoluted process of registration, according to Dan Bernstein, director at MarketCounsel, a regulatory and compliance consultancy.

“There so many assumptions surrounding if you need to register as an investment advisor,” said Bernstein. “Either at the SEC (Securities Exchange Commission) level or state level, assumptions are not good. “

In the world of compliance, registration may be one of the most confusing topics for hedge fund, or in general, private fund managers, according to Bernstein.

He notes that fund managers with less than 15 client accounts and less than 150 million of assets under management do not need to register with the SEC. However, managers need to register at the state level if “there’s a place of business in the state, and clients in the state.”

Such state-level requirements for registration are not contained to just the hedge fund community, said Bernstein. They have now expanded to “family offices,” a reportedly relatively new institutional pool of investors. Though Bernstein claims that scrutiny has just begun recently surrounding family offices now, they have been “in existence since the 1940s.”

However, perhaps hedge funds remain the sole villains in the eyes of regulators since the financial crisis of 2008, which tarnished the reputation of the industry.

“Venture capital firms do not need to register with the SEC, but hedge funds do,” he said.

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