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The Importance Of Compliance During Times Of Market Tumult

As uncertainty continues to affect global markets, investment funds have become hyper-focused and sensitive about keeping their regulatory and compliance houses in order. AlphaWeek’s Greg Winterton spoke to Fizza Khan, founder and CEO of Silver Regulatory Associates, about the importance of compliance during times of market tumult.

GW: Fizza, let’s begin with personal trading accounts. What do investment managers like hedge fund managers need to be cognizant of here?

FK: In times of increased market volatility, and especially when normally higher priced stocks dramatically decrease in price – like airlines now, for example – funds usually see an increase in their employees’ personal trading activity. First and foremost, the funds owe fiduciary responsibility to their investors and need to be cognizant that employees are not spending working hours focused on their own trading activity over that of the fund’s portfolio. Also, if the fund is shifting strategy, it’s imperative that the restricted stock list is regularly updated and that there’s firmwide communication about what stocks are on that list. 

GW: In the States, the SEC has moved several reporting deadlines. Are there any potential banana skins here that managers need to be aware of?

FK: Yes. While the SEC has provided extensions on several reporting deadlines, such as Form ADV and Form PF, there are stipulations that come with those extensions. It’s important for managers to read the fine print to understand whether they qualify. For example, you have to prove that the management of your portfolio has been directly impacted by the COVID-19 outbreak to qualify for the ADV deadline (e.g., the lead portfolio manager has contracted the virus or the operations of your firm are not fully functional because of needing to work remotely). Further, if the basis for the extensions meet the regulatory requirements specified, then it may trigger a disclosure event to your investors, which could lead to unintended business consequences.

GW: A significant part of the alternative investment industry is now working from home. What can Chief Compliance Officers do here to ensure they are adhering to their responsibilities?

FK: CCOs of SEC regulated investment advisers have supervisory responsibilities over the activities of the adviser. Even when working remotely, the CCO must continue to adhere to their regular standard for meeting that supervisory role and it can become increasingly difficult when there is less natural facetime. It’s vital that compliance maintain a presence and as strict a level of oversight over the manager as they would under normal working conditions. For example, even while working remotely, CCOs of private fund advisers should ensure they are continuing to participate in investment committee meetings and discussions. CCOs can solidify their supervisory positions by enhancing the firm’s existing policies and procedures to account for remote or distributed working environments.

GW: The importance of middle and back office functions has increased massively since the Global Financial Crisis 12 years ago. What do managers need to be aware of here?

FK: The Global Financial Crisis was a pivotal tipping point that brought compliance into the fabric of middle and back office operations unlike it had been involved with in previous years. No longer can departments function completely independently of each other and expect the firm to operate in line with its business and investment mandates and regulatory requirements. The level of collaboration is especially paramount during times of uncertainty, like what we are experiencing now. Portfolio managers need to be transparent and hyper-communicative with their middle and back office teams so they are able to conduct diligent reviews of transactions, alert the managers and compliance to unusual activities and continue to maintain detailed books and records. Managers should note that this is true for both internal staff as well as third-party service providers. (What are your critical service providers doing to make certain they are meeting their obligations to the firm?) This is not only in line with regulatory requirements, but also with investor expectations.

GW: Finally, Fizza, many managers have lost money in the past month or so. Investors understand that, but which managers will emerge from the current market dislocation strongest?

FK: Although we are experiencing unprecedented market volatility, managers who have instituted a strong operational infrastructure that allows for its investment management to continue seamlessly – regardless of its staff location – will emerge stronger than their peers. This infrastructure includes enhanced information security and IT measures; proper oversight and implementation of the firm’s business and regulatory policies and procedures; and routine check-ins with staff to assure them of the firm’s continuity.

Fizza Khan is Founder and CEO of Silver Regulatory Associates

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