>Jason A Scharfman
Hedge Fund Compliance
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.
The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more.
For a list of available titles, visit our Web site at www.WileyFinance.com.
Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is available
ISBN 978-1-119-24023-5 (Hardcover)
ISBN 978-1-119-24027-3 (ePDF)
ISBN 978-1-119-24026-6 (ePub)
Cover Design: Wiley
Cover Images: (top) © g0d4ather/Shutterstock; (bottom) © Rawpixel.com/Shutterstock
Preface
Compliance is one of the fastest‐growing areas in the hedge fund industry. Contributing to this change is a seemingly steady drumbeat of new global regulatory activity. In the United States and in Asia, for example, regulators have steadily enhanced their hedge fund compliance enforcement and surveillance activities. In Europe, broad shifts in the laws, such as the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID), have directly influenced the way hedge funds carry out their investment activities.
Today, hedge fund compliance has evolved into more than simply a regulatory exercise. Hedge fund compliance programs are now required to regularly engage compliance risks across a wide variety of operational and investment areas, ranging from cybersecurity and conflict of interest management to trade allocation and increased oversight of the use of investment research. To meet these challenges, hedge funds and their investors and service providers must continually reevaluate the role of the compliance function to ensure that they not only meet these new regulatory requirements but also keep pace with industry best practices. This book is written to assist these groups in embracing this challenge.
Readers of this book will come from different levels of sophistication, ranging from those in an academic setting and new to hedge fund industry to experienced hedge fund compliance professionals working in the compliance field. To assist in highlighting important compliance terminology as you read through each of the chapters, you will find key terms italicized and in boldface. Regardless of your previous compliance experience, this book can also serve as a reference source on specific compliance topics. To facilitate this, the chapters of this book have been organized by key compliance topic area for ease of navigation.
Specifically, this book is structured to provide an understanding of the core concepts of hedge fund compliance across three sections. The first section, Chapters 1 through 4, focuses on topics relating to the structure and duties of a hedge fund's internal compliance function. It begins by providing an introduction to the compliance function and the role of regulators. The Chief Compliance Officer (CCO) role, as well as the responsibilities of other shared and dedicated compliance personnel, are then discussed. This section concludes with an analysis of the function of internal compliance mechanisms, such as fund committees.
The second section of the book, Chapters 5 through 8, focuses on specific topics in compliance as well as the role of third parties in the process. This section begins by addressing the emerging role of technology in compliance management. The use of technology in performing a wide variety of compliance activities, including trade surveillance, archiving, and monitoring employee communications, is also covered. Next, the role of third parties that assist in compliance management, including compliance consultants, is discussed. Examples of key compliance documentation, including the Compliance Manual and Code of Ethics, are then presented. Finally, the process by which prospective and existing investors conduct due diligence on hedge fund compliance functions is addressed with a focus on the analysis of compliance policies regarding employee personal account dealing and material non‐public information (MNPI).
The third and final section of the book, Chapters 9 through 12, applies critical compliance concepts directly to the real world. It begins by focusing on historical case studies and illustrative scenarios as well as common compliance pitfalls. Interviews with third‐party compliance service providers are presented to demonstrate the practical opportunities and challenges facing hedge funds
