Hedge Fund Compliance

JASON A. SCHARFMAN is managing partner of Corgentum Consulting, a consulting firm specializing in operational due diligence reviews and background investigations of fund managers on behalf of investors. A leading expert in the field of due diligence, he is author of Hedge Fund Governance, Private Equity Operational Due Diligence, and Hedge Fund Operational Due Diligence.

• Preface xiChapter 1 Introduction to Hedge Fund Compliance 1Introduction 1Differences in Hedge Fund and Other Alternative Fund Compliance 1Hedge Fund Compliance Is Not Specific to One Country 4Do Alternative Investments Merit Special Compliance Considerations? 5Understanding the Hedge Fund Compliance Framework 9Introduction to the Hedge Fund Compliance Function 10Distinguishing the Legal and Compliance Departments 11Key Players in Compliance 12Standard Areas Covered by a Hedge Fund Compliance Function 14Compliance Function Roles and Authority 16Chapter Summary 17Notes 17Chapter 2 Introduction to Hedge Fund Regulation and Examination 18Introduction 18Different Types of Regulation for Different Financial Entities 18Why Regulation Is Needed 20Where Do Compliance Rules Come From? 22National and Global Jurisdiction 23Common Regulatory Interaction with Hedge Funds 24Regulatory Examinations 25Chapter Summary 28Notes 28Chapter 3 The Chief Compliance Officer and Regulatory Reporting 30Introduction 30Introducing the Chief Compliance Officer 30Regulatory Reporting 34Regulatory Reporting in Multiple Jurisdictions 34Common Regulatory Reporting Questions 35A Multistep Process 35Chapter Summary 40Notes 41Chapter 4 In-House Compliance Professionals and Hedge Fund Committees 42Introduction 42Common Compliance Function Tasks 43Firm Committees as Compliance Mechanisms 49Chapter Summary 53Note 54Chapter 5 Hedge Fund Compliance Technology 55Introduction 55Understanding the Hedge Fund Information Technology Function 55Primary Compliance Uses of Technology 58Compliance Considerations for Use of Electronic Data 59Compliance Oversight of Nonelectronic Data 64Business Continuity and Disaster Recovery Planning 64Chapter Summary 65Notes 66Chapter 6 Compliance Consultants and Other Compliance-Related Service Providers 67Service Provider Compliance 67Classification of Compliance Service Providers 67Service Provider Compliance Work 68Hedge Fund Compliance Consultants 69Chapter Summary 82Note 82Chapter 7 Understanding Key Compliance Documentation 83Reasons for Documenting Compliance Policies and Procedures 83Understanding the Goals of Compliance Documentation 84Jurisdictional Differences in Compliance Documentation 85Understanding Boilerplate Documentation 85Core Compliance Documentation 88Chapter Summary 97Note 98Chapter 8 Investor Evaluation of Hedge Fund Compliance Functions 99Introduction 99Compliance Evaluations in Investor Due Diligence 99Initial and Ongoing Compliance Analysis 101Evaluating Best Practice Compliance 104Key Compliance Analysis Areas 109Chapter Summary 118Note 118Chapter 9 Case Studies and Example Scenarios in Hedge Fund Compliance 119Introduction 119Compliance Scenario 1 119Compliance Scenario 2 122Case Studies 123Chapter Summary 129Notes 129Chapter 10 Common Compliance Pitfalls and How to Avoid Them 131Introduction 131Pitfall 1: Small Firms Build Large Firm Compliance Infrastructures 131Pitfall 2: Underspending on Compliance 133Pitfall 3: Lack of Independent Compliance Reporting 134Pitfall 4: Outsourcing All Compliance 135Pitfall 5: Relying on Technology and Compliance Automation 136Pitfall 6: Letting Investor Opinion Drive Compliance Priorities 137Chapter Summary 138Notes 139Chapter 11 Interviews with Compliance Service Providers 140Introduction 140Interview with Kent Wegrzyn (ACA Compliance Group) 140Interview with Vinod Paul (Eze Castle Integration) 160Chapter Summary 171Chapter 12 Trends and Future Developments 172Introduction 172Chief Compliance Officers Personal Liability Concerns 172Increased Senior Manager Regulatory Accountability 174Compliance-Related Insurance 175Increasingly Coordinated Hedge Fund Regulation in Europe 176Chapter Summary 177Notes 178About the Author 181Index 183