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What are the duties of a hedge fund compliance officer. At what point in the creation of a Hedge Fund should a compliance officer be hired?
Asked by Dan Constantine






Answer By John Schrier

Every SEC-registered investment adviser is required to have a Chief Compliance Officer. It's highly unlikely an adviser, even if not registered, will succeed in raising capital from an institutional investor without one.

Generally stated, compliance's duties are three-fold: (1) make sure the adviser's practices comport with its promises; (2) make sure the adviser's activities comport with applicable laws; and (3) make sure the adviser's systems respect its fiduciary duties to its clients. An adviser should have a code of ethics governing the personal trading practices of its covered employees, a compliance manual detailing the manner in which it handles trade allocation, best execution, marketing material review, proxy voting (if applicable), cross-trading, surveillance of communications, trade error correction, and soft dollar practices, among others. A policy covering gift and entertainment is customary, too. The compliance officer's duty, after building these systems, is to monitor and document compliance with same, and to train employees on the systems.

Compliance should be involved at fund inception. If a fund is going to launch without an internal compliance officer, it should retain the services of an outside service provider to build the system and then make sure the system is monitored. Consider, for example, the need to ensure portfolio compliance with investment restrictions. By having the compliance component involved in the initial build of the trading platform, it will be possible to effect monitoring of same from the first day of trading. If a compliance system is not implemented until after the trading platform is in place, the adviser may find it difficult and costly, if not almost impractical, to automate the oversight process.

Compliance is an organic system: it needs to change as manager practices and regulatory requirements change.