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Hey Hedge Fund Manager…Regulators Are Watching You!


Citing increased scrutiny of hedge fund managers post-2008, the Alternative Investment Management Association (AIMA) has published its first guidelines focusing on operational risk management processes and procedures.  As originally outlined in 2012 by the Basel Committee on Banking Supervision, the AIMA Guide defines operational risk “as the risk of loss resulting from inadequate or failed internal processes, people and systems or firm external risk.” While the Basel Committee did not consider reputational risk as part of its discussion of sound management, the AIMA Guide does discuss the issue or “reputational risk” which it says is significant for investment managers.

According to the AIMA, hedge fund managers, like their compatriot broker-dealers, RIAs, etc. face many kinds of operational risk, including but not limited to “business systems risk from internal and external sources, regulatory and outsourcing risk.

Like us, AIMA urges investment managers to strive to implement processes that will help identify risks and sources of risk, and put in place procedures to enable control and mitigation of such risks in line with their respective risk appetites.

Feeling hungry? What’s your appetite for risk?

Some of the risks AIMA discusses, like trading, execution and market manipulation risks; post-trading risks;  and counterparty risks are beyond the purview of an integrated compliance technology platform like Patrina’s Compliance Suite which automates workflow and delivers a 360o view of a client’s entire, non-trading compliance systems from a single dashboard.

However, issues like managing business codes of conduct and human capital; data management and system risk; outsourcing middle office/back office and information technology (IT); communications risks, addressing spokespeople, responding to incoming queries, and other marketing-forward materials; as well as other legal and regulatory compliance exposures are right up Patrina’s alley.

According to Jack Inglis, AIMA chief executive officer. “Operational risk is an increasing focus of investors and regulators alike. Both of these groups will expect managers to have sound operational risk frameworks and will also be expecting next generation managers to be progressing along the spectrum of increasingly sophisticated approaches as they grow.”

Will you be ready?

The AIMA Guide discusses the initial due diligence, service level agreements, and ongoing due diligence supervision level agreements, ongoing due diligence, supervision and monitoring and operational monitoring systems.  It also seeks to support hedge fund managers in ensuring communications are consistent and represent the views of the investment manager and that specific individuals are authorized to act as spokespeople to respond to incoming requests from the media and regulators. They suggest (and a system like Patrina’s Marketing Materials Module can provide) tools to manage the process of compliantly creating, delivering and tracking marketing materials, performance advertising, social media, etc.

Key is creating a compliance infrastructure, registration and reporting requirements, pre-empting, tracking and addressing compliance breaches and, anticipating regulatory requirements, new markets, investments and so on.

No one is immune from regulation

With increased oversight come more paper, more files, and more data. Regulatory compliance requirements are getting more all-consuming and complying can often times feel like an undertaking without end. When will you find the time to do your real work? Let’s talk. Ask about Patrina’s comprehensive compliance solutions specifically designed for the financial services community.

Let’s talk (212- 233-1155).