Once viewed as a luxury reserved for only the largest hedge funds, compliance technology has entered the mainstream. The complexity of reporting obligations, combined with the expanded number of hedge fund investment advisers that are now registered with the SEC and CFTC, are the drivers of the increased usage.
While one size definitely does not fit all in this area, the hedge fund market uses technology solutions in these areas:
-Reporting: Detailed reporting requirements in the SEC’s Form PF, the CFTC’s Form CPO-PQR as well as the reporting that will be required by the European Union under the AIFMD regulatory regime, are forcing hedge funds to aggregate, process and retain large amount of data. While some funds have outsourced these projects to administrators, many have retained the function in-house and have either developed their own systems or are employing off-the-shelf software to assist with the process.
-Compliance Program Management: “Dashboard” systems have become more popular with the rise in registered investment advisers, all of whom are subject to SEC and CFTC record-keeping requirements. Most offer record retention features as well as electronic compliance certification features. Some offer compliance calendars with automated reminders of filing deadlines as well as other important compliance dates.
-Personal Account Record Retention and Surveillance: These systems automate the often onerous task of intake and review of employee personal account brokerage statements. Some of these systems offer enhanced review features which monitor for conflicts or manipulative patterns of trading. By significantly reducing the administrative burden in-house, these products are often viewed as extremely worthwhile by managers.
-Portfolio Monitoring: Trading and order management platforms have always had compliance applications, such as monitoring for positions in securities over a certain percentage to enable accurate reporting. Additional compliance features are meeting other needs, such as recording trade allocations, monitoring for position limits and stopping trades that are not allowed under EU short-selling bans. These features may already be contained on the firm’s trading platform, although some managers choose to develop them in-house.
-Electronic Communication Archiving and Review: Once viewed as optional, these systems have now become standard in the industry. Registered investment advisers are not only required to basically retain all electronic communications, but to monitor them as well. As the need has grown, these systems have become more sophisticated in terms of search and review features. Some are delving into archiving of social media sites as well.
-Marketing Applications: While not primarily driven by compliance, many hedge funds are now employing Customer Relationship Management (CRM) systems which do serve a compliance purpose by memorializing investor contacts. These systems may become more important for compliance as marketing regulations for US hedge funds come into effect in the EU.
As pressures increase from both regulators and investors, we believe the compliance technology will continue to play a key role in hedge fund operations.
Read more articles about the hedge fund industry and related legal issues at Hedge Rows, a blog by Judith Gross.
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