Fund managers urged to have responses to regulatory enforcement actions in place

Operational Risk
27 Oct, 2014

Private funds should have a strategic response plan in place to deal with any potential regulatory enforcement action, according to Cordium, a compliance consultancy

This comes as alternative investment fund managers are facing unprecedented scrutiny from regulators. The Securities and Exchange Commission (SEC) opened up 908 investigations in 2013, an increase of 12 per-cent from 2012. In addition, the SEC obtained 574 orders of investigation in 2013, a 20 per-cent increase from the year before.

“Private funds have done a lot of work preparing for SEC inspections and examinations but they have done very little to prepare for an actual SEC investigation. The SEC and other regulators are being very proactive, and the chances of a firm being subject to regulatory scrutiny are higher than ever. Therefore, it would be sensible for firms to have a response plan in place to deal with any enforcement action,” said Bill Mulligan, managing partner and chief executive officer at Cordium US.

Regulatory investigations – even if they do not lead to criminal sanctions- can frequently prompt an exodus of investors. They can also be very costly in terms of legal fees accrued. “Whenever there is a regulatory investigation, enforcement lawyers will be called in. If the firm has a comprehensive response plan, it will enable the lawyers to focus on the vital work rather than the non-vital issues, which would of course save money. Furthermore, employees should be trained on how to deal with investigations, and taught how to deal with the press, investors or counterparties. This should be subject to quarterly, semi-annual or annual testing,” said Mulligan.

Regulators in the US, the UK and Hong Kong have dramatically ramped up their expenditures and headcounts since 2006, according to research by Kinetic Partners, a compliance consultancy. The SEC has increased its expenditure by 62 per-cent and the number of employees by 22 per-cent. The UK’s Financial Conduct Authority (FCA) saw its overheads jump by 48 per-cent while overall headcount grew by 53%. Meanwhile, the Hong Kong Securities and Futures Commission (SFC) saw a 120 per-cent increase in expenditure, and a 51 per-cent growth in staff. The combined spend by all three regulatory agencies totalled $2.4 billion throughout 2012 and 2013, a $900 million increase since 2006.

Regulatory fines have also skyrocketed. Penalties imposed by the SEC and FCA have noticeably increased since 2008. The average size of penalties issued by the SEC increased by 36 per-cent between 2008 and 2013, and now stands at approximately $4.99 million. The UK also saw the average penalty size increase from $750,000 in 2008 to $2.06 million in 2012. There was a 511 per-cent increase in the size of penalties imposed on financial institutions in the UK between 2012 and 2013 although this is mainly attributable to the fines levied against those involved in the recent LIBOR scandal. 

US law enforcement agencies have claimed some high-profile scalps and settlements against private funds over the last three years including the Galleon Group and SAC Capital. “The regulators are very confident at the moment in terms of enforcement. It is advised fund managers prepare for any enforcement action and have best practices in place to handle such eventualities,” said Mulligan. 

fund managersCordiumregulatorsenforcementSEC