More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Global hedge fund managers are spending more than 7% of their total operating costs and more than 10 basis points (as a percentage of assets under management) on compliance — amounting to $700,000 annually for small firms, $6 million for medium firms and more than $10 million for the largest ones, according to a just-released report.
The report, released by KPMG International, the Managed Funds Association and the Alternative Investment Management Association, surveyed 200 hedge fund managers representing more than $900 billion in AUM and found that the hedge fund industry spends more than $3 billion on compliance-related costs and that the “vast majority” of firms expect compliance costs to increase over the next five years.
SEC registration and compliance was listed as the second-most costly regulation. Forty-two percent of firms who have registered or are registering with the SEC deemed compliance costs to be “high,” with only slightly fewer (40%) characterizing their costs as “medium.”
Of those hedge funds registered as an investment advisor with the SEC, more than a third (36%) said they spent between 50 and 100 hours preparing and filing for SEC registration; a quarter spent between 100 and 500 hours; 7% spent more than 500 hours.
Cipperman Compliance Service said it suspects compliance costs “are even higher for U.S.-based registered investment advisors that manage registered funds or have a broker-dealer affiliate.” Says Cipperman: “We have always asserted that firms should spend at least 5% of total revenue on compliance or 2 bps of AUM.”
The SEC’s new Form PF, which must be completed by registered investment advisors that manage $150 million or more in assets attributable to private funds, is taking more time. More than 20% of those firms required to complete the SEC’s Form PF said they spent more than 500 hours preparing and filing their initial submission.
“Form PF is hundreds of pages long," noted one U.S.-based manager. "We had to outsource the heavy lifting to service providers and pay technology providers for risk and data warehousing services. We spend six or seven hundred thousand bucks a year on remaining compliant.”
Other time-consuming regs are the Foreign Account Tax Compliance Act (FATCA), which, as the report states, is essentially designed to prevent U.S. citizens and residents from using offshore accounts and investment vehicles to disguise their identity and thus avoid paying U.S. taxes.