This week, we had the pleasure of speaking with Shelly Rosenweig, Partner at Haynes and Boone LLP, who discussed the importance of compliance as well as the 2016 examination priorities of the SEC. Throughout the webinar, Shelly reminded attendees about the importance of undertaking compliance measures right at the start of a launch, not only for regulatory purposes, but to demonstrate to prospective investors commitment to compliance.
2016 SEC Examination Priorities
There are four priorities for the SEC that any startup manager will want to be aware of:
Exempt Reporting Advisors (ERA) – An exempt reporting advisor is any advisor that takes advantage of the venture capital fund advisor exemption or the private fund advisor exemption. The private funded advisor exemption is available to investment advisors whose clients are solely comprised of private funds who have less than $150 AUM and are not required to be registered as an advisor in the state where their principal office is located. In November of 2015, OCIE began to examine ERAs as part of their routine examinations.
What can ERAs do to prepare?
Ensure your information provided on your ADV application is accurate and consistent. The ADV application is required to be updated annually and when changes occur.
Make sure marketing and advertising material are in compliance with the anti-fraud provisions of the Advisers Act preventing advisors from engaging in manipulative activity. For example, advisors are surprised to learn that performance returns may only be disclosed to prospective investors in certain instances
Confirm you are in compliance with the “pay to play” rule under the Advisers Act (Rule 205). Pay-to-pay generally refers to various arrangements by which advisers may seek to influence the award of advisory business by making or soliciting political contributions to government officials charged with awarding such business.
Comply to the Books and Records Requirements under the Advisers Act. This technically only applies to registered advisors, but the SEC has championed the importance of organized record keeping. These records fall under two categories, the first being general accounting. These are business records, such as keeping ledger of sales. The second is additional records, such as memos describing disciplinary events.
To help emerging hedge fund managers we are running a 6-week Hedge Fund Launch Webinar Series. This week we were joined by Frank Napolitani, Director, Financial Services at EisnerAmper. During the 30-minute interview, Frank shared insights on the benefits of outsourcing to service providers as well as advice on how to conduct proper due diligence on front, middle, and back office operations.
The Learning Curve
“There is a learning curve to get your hands around what it takes to run a business,” Frank began. Often, he said, a portfolio manager that has left a larger hedge fund complex or investment bank knows perfectly how to run a book, but has little knowledge about how to run a business. The smartest managers, Frank said, are the ones who “sit back, listen, and consult a number of different service providers in the space before moving forward.”
He went on to note that the operational due diligence (ODD) industry has grown dramatically post-Madoff. While a manager’s pedigree, investment process, and performance used to take precedence, it is now front, middle, and back office operations plus legal compliance that are most important.
Frank warned: “Keep everything up to date.” Sophisticated investors will follow up quarterly, twice a year, or annually. Because they collaborate with many ODD teams, research teams will immediately have a feel for what is right and what is wrong with a manager from a front, middle, and back office perspective. “They won’t waste too much time on someone they won’t seriously invest in,” Frank concluded.
The information below was originally derived from the expert panelists who spoke at a 2010 Eze Castle Integration event. Given how important this topic is we’ve updated the article to reflect today’s market.
The subject of hedge fund operational due diligence is one that has risen to the forefront for both hedge fund managers and investors in recent years. Prior to the economic downfall in 2008 and high-profile investment scandals made infamous by Bernard Madoff and others, hedge fund due diligence was viewed as an unnecessary assignment.
Historically, there has been a general lack of transparency within the hedge fund industry; larger funds, particularly, used to balk at investor inquiries. They figured there would never be a shortage of investors, so there wasn't a need to spend extra time satisfying their needs.
Due diligence, as a process, did not gain significant importance until recently. in the past, the responsibilities associated with it would often fall under the role of a CFO, CCO or other executive – someone who had very little time to devote specifically to due diligence. But as the industry has evolved over the last several years, so has the need and desire for operational due diligence.
So what exactly has changed?
Successfully launching a hedge fund is a complex endeavor. Not only must emerging managers evaluate traditional deployment strategies, but consider current factors influencing the financial landscape.
Last week, Eze Castle Integration presented a webinar, “How to Launch a Hedge Fund,” featuring an expert panel that addressed some critical areas for consideration, notably capital introduction, legal and technology. There was quite a bit of content discussed during the 1-hour event, so we’ve pulled out some key takeaways.
Capital Raising (Paul Schultz, Director of Capital Introduction, Wells Fargo Prime Services)
Examine both content and context, i.e. cash inflows and outflows as well as the “big picture” that accounts for volatility
Be aware of the kinds of investors coming into the hedge fund space. Large and institutional pension plans are currently the largest investor base.
Be prepared when speaking to investors. Target those who have a history of being receptive to founder share class and who may offer lower management and performance fees.
Show investors that you have a 3+ year budget for working capital without any performance fees.
Have a well thought-out blueprint. Clarity and intention make all the difference.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing Videos And Infographics
Today’s the day.
The National Futures Association ("NFA") Interpretive Notice Regarding Information Systems Security Programs goes into effect. The NFA's Interpretive Notice to NFA Compliance Rules 2-9, 2-36 and 2-49 entitled Information Systems Security Programs requires Member firms to adopt and enforce written policies and procedures to secure customer data and access to their electronic systems.
The Cybersecurity Interpretive Notice applies to all membership categories--futures commission merchants, swap dealers, major swap participants, introducing brokers, forex dealer members, commodity pool operators and commodity trading advisors.
Rather than taking a ‘one-size-fits-all approach,’ the Cybersecurity Interpretive Notice adopts a principles-based risk approach to allow Member firms some degree of flexibility in determining what constitutes "diligent supervision," given the differences in Members' size and complexity of operations, customer types and counterparties.
But whatever approach is taken, the Cybersecurity Interpretive Notice requires Members to adopt and enforce an information systems security program (ISSP) appropriate to its circumstances.
Information Systems Security Program Key Areas
Similar to the SEC’s expectations, the Cybersecurity Interpretive Notice requires a written information security program to contain:
A security and risk analysis;
A description of the safeguards against identified system threats and vulnerabilities;
The process used to evaluate a security incident, including impact and incident response; and
Description of ongoing education and training related to information systems security for employees.Executive-level participation and annual review of the information security program is expected. Additionally, firms must provide employees training during the onboarding processes as well as periodically during employment.
Categorized under: Security Launching A Hedge Fund Hedge Fund Insiders Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Business Continuity Planning Trends We're Seeing
Investment firms often place too much emphasis on managing portfolios and not enough on managing the business as a whole. Particularly for startups entering a competitive marketplace, expectations are high. That means you have to demonstrate to investors that you take your business seriously and that you’ve made investments in your operations, technology, etc. that will fortify your firm and provide a solid foundation for investment success.
The decisions you make from the outset will define how your firm is regarded within the industry, by both investors and competitors. By taking into account all aspects of your firm and relying on trusted service providers to support operations, you prove to the greater investment industry that you should be taken seriously and can operate successfully in a challenging environment.
Transparency is of critical importance.
Since the 2008 economic collapse and scandals caused by the likes of Madoff, transparency has become a key requirement for investors. Nothing less than full disclosure is expected of firms from the newest launches to the most established investment firms. As such, fund managers should take this to heart and make strong efforts to comply with increasing investor expectations.
The following is the second excerpt from our new whitepaper, Launching a Hedge Fund: 10 Keys to Success. Don't forget to visit Hedge IT on Thursday as we reveal the last of our key considerations for starting a hedge fund.
To read part one, click here.
Develop an IT budget for your first 2-3 years.
Operating capital may be limited in the first few years after your launch, so careful budgeting and long range planning will serve your firm well. Your information technology budget should include priorities and figures for at least two to three years, including infrastructure/hardware and software requirements. Some questions you’ll want to consider:
How many offices are you launching with? Do you plan to open additional offices in the near future?
How many users do you have on day one? How many can you expect to have in years 2 and 3?
Where are your offices located? Are there cost differences between domestic and international offices?
What are your trading practices and how does this impact your budget?
What kinds of systems do you need? (Order Management, Portfolio Accounting, Risk Management, CRM, etc.)
Ensure your technology budget coincides with your firm’s growth plan. Do you expect to grow quickly? Open new offices? Expand internationally? You will need to account for these changes.
Understand hedge fund regulations and how they affect your firm.
Governmental oversight of the financial industry has evolved dramatically in the last decade. Hedge funds, private equity firms and registered investment advisers now operate in a world where they are beholden to regulatory bodies with growing expectations and requirements. When launching your hedge fund, you’ll need to be clear up front with any responsibilities you may have to any applicable agencies – in the United States, that means the Securities and Exchange Commission (SEC). Are you required to register? If so, represent your firm accurately and be descriptive of your operations. If not forthcoming, you may open up your firm to serious regulatory and criminal prosecution.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Software Trends We're Seeing
The following is an excerpt from our new whitepaper, Launching a Hedge Fund: 10 Keys to Success. Be sure to come back to Hedge IT next week as we reveal more of our key considerations for starting a hedge fund.
Do your legal homework.
One of the first decisions you’ll need to make as a new investment manager is how to set up your hedge fund. Your organizational structure will typically reveal itself as a limited partnership (LP) or limited liability company (LLC). You may also consider a master-feeder fund structure, which could provide favorable benefits, and a domestic or offshore choice may also come into consideration. Many of these decisions will be impacted by the assets you plan to launch with or if you’re using or planning to solicit seed or acceleration capital.
Based on these structural decisions, you’ll need to determine your tax implications as well as regulatory requirements. In the United States, the Securities and Exchange Commission (SEC), under the Dodd-Frank Act, requires asset managers managing more than $150 million in AUM to register and hence meet a host of reporting requirements.
Create a marketing plan.
Once upon a time, hedge fund marketing was generally frowned upon, and in some cases, illegal. It wasn’t until the JOBS Act was enacted in 2013 that hedge funds finally had the opportunity to shed their fears of noncompliance and publicly market and advertise their funds. There are a variety of communication options firms can use to solicit investors – from traditional print and websites to social media, video and email marketing. Regardless of how, firms should build comprehensive marketing plans that will support their business beyond the launch phase.
Today's hedge funds are facing an environment defined by regulatory pressure, investor demands and fierce competition. For hedge fund startups, the challenges are even greater, so too are the demands. Successfully operating a new startup beyond the first year is a feat many managers struggle to accomplish, therefore it's critical for emerging managers to gain a full understanding of the industry that awaits them and the hurdles they should expect to face.
While the list of considerations is surely long for new managers, we've whittled it down to 10 Keys to Launching a Hedge Fund Successfully - a guide for new startups to use when setting off on their new journey.
Take a look at our latest video for a quick look at our 10 Keys to Success. And be sure to come back to Hedge IT later this week when we'll be sharing an excerpt from our brand new whitepaper on the same topic!
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing
In today’s competitive market, research management software (RMS) has become a must-have integrated feature for investment management firms. Significant benefits offered via RMS have caused a ripple effect of soaring adoption rates across the global investment industry. In this article we’ll examine how adopting a research management solution could benefit your firm.
With offices, colleagues and clients spread across the world, firms need to consolidate data in an organized fashion. From meeting and call notes, to audits and analyst reports, the demand for readily accessible information is ever burgeoning. Storing information within multiple programs and folders not only welcomes disorder and the opportunity for digression in the workplace, but also increases costs and wastes valuable time. This prehistoric method of aggregating data has been replaced with advanced RMS, a much more viable, flexible and comprehensive solution. Hosting a firm’s data within a user-friendly, central repository simplifies processes, optimizes productivity and uncovers new business opportunities. When selecting a RMS, managers may consider a generic or industry-specific product. While both options present benefits, the latter assimilates seamlessly with an investment firm’s daily workflows, terminology and diverse range of data. An ideal RMS will also offer customization, accessibility and integrate with other applications, such as Outlook.