September 24, 2012
By Shyam Prakash and Steven Richard, Gravitas
Chief Compliance Officers (CCOs) at alternative asset management firms are facing increasing challenges overseeing and monitoring compliance with respect to investment guidelines and portfolio compliance mandates. To meet the new and growing challenges of effective compliance and risk management, a new trend is emerging among CCOs—namely, an expansion of the role to include greater involvement than ever with the investment process and, at the same time, expanded monitoring of portfolio compliance risk. Compliance risk can be broadly defined as monitoring compliance of investment style, portfolio construction and investment risk management, where these and other key areas relate to investment mandates, risk management guidelines and investor disclosures.
Several Factors Behind Heightened Oversight
CCOs are also introducing a wider regulatory focus on matters that reach beyond traditional “hot topics,” such as code of ethics and insider trading. These additional areas include investigating the control structure of the firm’s investment management practices and adhering to investor disclosures. Collectively, this heightened scrutiny stems from several contributing factors, including:
- Market events over the last several years have forced fund managers to meet investor demands for greater visibility into risk management policies and practices. As a result, there has been an increase in the level of investor disclosures surrounding portfolio strategy risk and compliance (e.g., control over “style drift” and concentration risk).
- Many larger, more experienced investors have been turning to separately managed accounts to gain access to prominent alternative investment managers. In doing so, these investors have been able to secure increased transparency and risk monitoring with respect to investment managers’ trading strategies, portfolio construction, risk metrics and portfolio performance.
- Additionally, with the implementation of Dodd-Frank, there has been a significant increase in the sheer number of SEC-registered advisors. This brings with it the attendant burdens of demonstrating and documenting appropriate compliance with investment policies, procedures, and other elements that comprise fund offering memorandums, external marketing materials and internal operating manuals.