More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
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.