Survey: Compliance Vigilance Remains High


A recent survey of investment advisers showed that insider trading continues to be a hot button compliance issue, along with advertising/marketing, social media and political contributions/pay to play.

The Investment Adviser Association, ACA Compliance Group, and Old Mutual Asset Management completed a survey of 462 buy-side compliance professionals in April and May.  Most respondents were advisers to hedge funds or private equity funds (56%) and had assets between $1 and $10 billion (40%).

Compliance remains a priority

Based on the survey, compliance is still a high priority.  79% of firms indicated that they have not decreased compliance testing in any area.  68% of firms reported that their Chief Compliance Officer (CCO) is a senior executive in the firm.  Nearly all (99%) firms reported that they do not outsource the CCO role.  63% of CCOs are wearing two or more hats.

8% of firms reported detecting material compliance issues and 71% detected compliance issues which were determined not to be material.  The most common material issues were in the areas of advertising and marketing, personal trading, client guidelines, and custody.

The majority (55%) spend over $250,000 per year in compliance expenses including compensation costs for compliance personnel.  40% employ 2-5 compliance personnel and another 20% have more than 6 compliance staff.

Advertising and marketing is the “hottest” compliance topic cited in the survey, with insider trading as the second most frequently mentioned “top of mind” topic.  Valuation, social media and political contributions/pay to play were also frequently cited.

Soft dollar compliance

One of the more interesting sections of the survey was devoted to soft dollars.  48% of respondents get proprietary research from investment banks.  Another 17% say that proprietary research is forced upon them (“Our firm does not actively seek out third-party soft dollar products and services but may receive them.”)  38% get independent research paid through broker dealers.  Nearly a third (32%) say they don’t get proprietary research, which may be largely smaller investment advisers (32% of respondents had assets under $1 billion.)

Very strangely, 16 respondents reported that they use client commissions to pay for “referrals and other products and services outside the Section 28(e) safe harbor.”  This doesn’t compute.  If the payments were outside the safe harbor, presumably that would be a material issue.  Yet only 1 respondent said that they had any material soft dollar issues in response to an earlier question.  So at least 15 buy-side CCO’s don’t consider commission payments outside the safe harbor material???  What are we missing here?

Soft dollar testing is all over the map.  Respondents were invited to check all soft dollar tests that they utilize.  Only a third of respondents (34%) review each soft dollar product and service to confirm that it is covered by Section 28(e).  (Perhaps this explains why so many commission payments are outside the safe harbor.)  A third (34%) require written approval for all soft dollar requisitions and review those approvals against actual expenditures.  Less than a third (27%) review each soft dollar product and service requested or obtained for reasonableness of cost and value to the firm, even though this is required for all those relying on the 28(e) safe harbor.  34% of respondents do no soft dollar testing at all.

Social Media

83% of firms have adopted formal written policies concerning social networking, up from 64% in 2011 and nearly double the percentage of 43% in 2010.  Fewer firms prohibit the use of personal social media sites for business purposes, down to 49% from 54% in 2012, but 43% report that their social media testing has increased in the past year.

LinkedIn was the most frequently permitted social media site (45%).  Only 11% allow employees to use Facebook and 9% allow employees to use Twitter.  However, as more research gets delivered through Twitter, we expect usage to increase.


Although prosecutors are reportedly close to wrapping up their longstanding investigations of SAC Capital, it does not appear that buy-side compliance concerns are abating.  The compliance infrastructure at asset managers is significant, with CCOs at a senior level and in most cases having a team of compliance staff reporting to them.  Compliance testing remains vigorous.  Insider trading remains a top-of-mind issue for compliance personnel.  The compliance around social media continues to evolve, with more asset managers permitting use of social media (mainly LinkedIn) but more firms having social media policies and testing in place.  The survey indicates that there are some idiosyncrasies in soft dollar compliance which perhaps reflects lower regulatory vigilance of soft dollar compliance in the U.S.


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1 Comment

  1. Sanford Bragg on

    Comment from a reader:

    “In the section on Soft Dollar compliance, where 16 survey respondents reported using client commissions to pay for referrals and other products and services outside of the SEC 28(e) safe harbor… A possible reason the 15 respondents have not experienced a material issue, is if they are non-registered Hedge Funds who fully disclose (via the Fund offering documents) to their investors that they are using commissions this way. This however does not mean they do not need to have a process in place to test for eligibility and it is alarming that 34% of respondents do zero testing at all. All Funds should look to you guys for help with this!”

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