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Keeping your legal process transparent and consistent

by Frank Caccio | June 23, 2020 | Compliance Management
Keeping your legal process transparent and consistent

Having a comprehensive legal framework at an asset management firm will ensure a consistent approach to documentation, transparency for auditors and investors, and reduce liability issues.

Today’s investors have become much more savvy in understanding the mechanics of asset management. They seek relationships that lean more toward partnerships than previously. They want confidence that the firm is accounting for more than just producing expected returns. Investors also want to see a high level of regulatory and investor protection should adverse situations arise. In short, they want a firm to have its ducks in a row rather than be surprised that it doesn’t at the worst possible moment.

Through due diligence, many investors now perform a rigorous review of the firm’s operational and compliance procedures before committing major capital. A simple request for the table of contents to the compliance manual allows them to verify comprehensiveness and some can—and will—take it a step further and want to see the specifics of valuation procedures, or how the process is distributed throughout the firm. Risk control has become a center of focus more than ever. An investor will want to see policies and the processes for executing them. They might even ask for suitable examples of processes for more clarity. Additionally, they seek demonstrable verification that everyone involved in the management of their funds understands these procedures, usually in the form of binding legal agreements from employees that they
have read and understood compliance requirements.

As investors have become more educated on the investment process, they have also become more aware of the legal issues surrounding it. They arrive knowing SEC regulations and local jurisdiction laws and want assurances that they are being met. The best way to respond to these requests within the scope of the client relationship is to be prepared to answer them as fully and demonstrably as an audit review. Instituting a regular, calendared mock audit will benefit the firm in several ways:

  • Staff will understand the gravity of the issues and senior management’s interest and support;
  • Faults and errors can be caught and corrected in a non-critical situation;
  • Lack of process can be exposed and implemented, and weak processes can be strengthened.

For more objectivity, contracting with a third-party to perform these mock audits can increase confidence that nothing is overlooked. An additional benefit of performing such a serious review is that at some point an actual regulatory exam will take place. The governing body will perform its review and respond with a “deficiency letter” if it finds flaws, which can be minor or major, with a directive to correct the issue(s) within a certain timeframe. These deficiency letters or the situations
that produced them may be requested by potential investors as a means of gauging management’s ability and success with correcting errors.

Lastly, be consistent in all procedures and materials, internal and external, when building a legal framework and documentation. For instance, sales and marketing materials must match what is said in offering memoranda. Risk control systems must actually perform in accordance with the stated processes for compliance. Inconsistent, vague, and even contradictory documentation will send up red flags with auditors and investors that the firm’s legal regime is not as stringent as it should be. In a competitive investment environment, an asset management firm should always avoid any matters that will cause a potential investor to invest elsewhere.

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