In 2004, the Securities and Exchange Commission outlined a series of compliance requirements to be fulfilled by hedge fund advisors. A compliance department ensures that the employees are abiding by these rules set in place by the SEC, with the Chief Compliance Officer heading the task.
Hedge funds have a few options. They may outsource this task to compliance professionals or they may designate the duties to a specific person within the firm. This person may or may not have other duties within the hedge fund. For a large hedge fund, the Chief Compliance Officer generally will not hold another position. Hedge funds may also choose to hire new staff to complete these functions.
According to the SEC, the following requirements must be met by advisors:
- Registration by filing a Form ADV under which hedge fund advisers must disclose information about their business, affiliates and owners as well as disciplinary history
- Comprehensive compliance procedures
- Designation of a Chief Compliance Officer
- Specific procedures governing proxy voting
- A code of ethics including requirements for personal securities reporting
- A commitment to a program of compliance controls combined with SEC examinations in order to foster a culture of compliance by advisers
There are several areas within a hedge fund that require compliance. Marketing for example, requires the compliance professional to be familiar with all of the do’s and don’ts associated with hedge fund advertising. For instance, a hedge fund website has many rules and regulations that must be abided by. Since hedge funds are generally considered riskier than other traditional investment vehicles, only accredited investors may have access to the site. Therefore not only does the website content have to be monitored and secured, but it must be verified that any users are, in fact, accredited and able to invest in hedge funds. Other compliance issues stemming from websites include the use of language. Hedge funds must be careful not to “guarantee” anything, but rather present their product in a somewhat transparent light as possible while also portraying the various risks.
Compliance officers also must be familiar with the anti-money laundering procedures, which were set in place after 9/11 and ensure that companies establish anti-money laundering systems and supervisory systems. Furthermore, compliance is also needed for the formation of the fund, from the set-up procedures to the step-by-step process needed to launch a hedge fund. Generally, a good legal team will require an adviser to disclose every aspect of how they plan to do business via the offering documents. Good compliance programs will outline exactly what an adviser says they will do, and abide by it. Otherwise, an investor may feel misled should the fund go awry and can claim an adviser did something wrong, a significant risk to the hedge fund. Making sure employees, especially the traders, are adhering to all standards is also up to the compliance department, along with investment management and monitoring risks involved. Here are a few of the standard tasks that may be assigned to you:
- Compliance training of new hires within the firm
- Support compliance testing and monitoring
- Prepare written documents to address any compliance problems within the company
- Preparing reviews on a quarterly and annual basis
- Conduct background checks on managers
- Maintain onshore and offshore fund documentation
- Draft documents such as resolutions and amendments
- Maintain compliance as outlined by the Investment Advisors Act of 1940 and the SEC
- Completion of subscription and redemption forms
Taking a job as a compliance professional requires several things. Usually a bachelors degree is preferred, along with some experience in working with investment advisory firm. Extensive knowledge and understanding of SEC guidelines is a must. Chief Compliance Officer positions require a law degree, but salaries generally range from 400,000 to over 1 million a year. CCO positions also usually require a minimum of 5 years experience and the ability to handle multiple large tasks.