IMS Group: Shifting the burden of compliance from hedge funds

Feb 09, 2011
by Charles Gubert

Over the next few years, the regulatory landscape governing hedge funds will be markedly different. Compliance staff in numerous asset management firms are currently sifting through a whole raft of edicts dictating what their outfits can and cannot do. This is not a simple, straightforward task.

To put what some of these people are doing into perspective, the US Dodd-Frank Act runs to nearly double the length of the epic Russian novel ‘War and Peace.’ Anyone who has slugged through the thousands of pages of Tolstoy’s (somewhat tedious) work will know that is not an easy feat to digest.

Asset managers have a further disadvantage in that they need to get up to speed with all of the requirements incredibly quickly. The powers that be in the European Union (EU) have also imposed tough rules on the industry through the Alternative Investment Fund Managers Directive (AIFMD). And those are just two pieces of legislation. Other incoming regulations include over-the-counter derivatives clearing reform, EU short-selling regulations, the Markets in Financial Instruments Directive (MiFID) II, Basel III and Solvency II.

All of this is undoubtedly going to increase the workload on middle office staffers. However, one group does stand to benefit – the compliance consultancy firms. COO Connect speaks to London-based IMS Group about its services and the implications these new regulations will have on asset managers.

With the ever expanding and increasing regulation, IMS’s group chief executive Michel Van Leeuwen has serious ambitions about growing the company’s reach. He joined the firm following its acquisition by private equity shop Sovereign Capital and he wants IMS to be a global compliance consultancy leader.”We want to expand our US and Asian operations because the larger hedge funds want a one stop shop across multiple time zones. We have a few targets for acquisitions and partnerships in these areas,” he says.

Van Leeuwen’s objective of turning IMS into a major international player has of course been helped by the influx of regulation. Hedge funds are continuing to outsource their compliance operations – many of them have found themselves overwhelmed with bureaucracy. By outsourcing this all to firms like IMS, fund managers can in turn do what they do best – manage their portfolios and seek solid returns for their investors.

Group director Stephen Burke believes IMS’s sheer size gives it a significant competitive advantage in attracting new hedge fund clients. “There has been a flight to quality. It is not just about investors seeking bigger managers but it is also about people looking at bigger and better resourced compliance consultancies,” he says

Low-staffed compliance shops could find themselves inundated with the numerous regulatory proposals being outlined by supervisory authorities. “The smaller compliance firms are going to have to consolidate or seriously invest to be able to keep up with the regulatory rate of change,” adds Van Leeuwen.

While size clearly does matter, IMS prides itself on its proactive work ethos. The firm has numerous experts who continuously review and identify regulatory requirements that affect their client base. “Our regulatory consulting team is incredibly client focused. We provide our clients with compliance infrastructure and maintain it – we ensure the clients also keep it up to date. We monitor our customers’ adherence to compliance requirements and report back to them where they may be falling short. This is just part of our ongoing compliance service,” highlights Burke.

Ensuring clients are kept up to date on the regulatory front is a fundamental prerequisite for IMS. Burke stresses the company interacts on a daily basis with clients. “Each client has one quarterly on site business visit and they can call us on a daily basis. We will sit in meetings and make calls out to clients. We make sure our clients are on top of all of the regulatory requirements,” he adds.

As things stand, the firm is helping many hedge funds meet the strict registration requirements outlined by the US Dodd Frank Act which need to be met by June 2011. The company ran two seminars (back in November 2010 and earlier in January) to keep people informed about the provisions in the law. It has also trained a team in London to help hedge fund clients register with the US regulatory authorities in good time.

In terms of the AIFMD, the group has a bit more leeway as the bill has yet to be fully passed by the EU. Nevertheless they have been reviewing the details of this legislation intensely since its inception back in April 2009. However, they have not been pushing fund managers to adopt AIFMD requirements too prematurely. “We don’t use the fear card. We don’t want to cry wolf,” says Van Leeuwen. IMS does not believe it is necessary for fund managers to worry incessantly about the incoming EU requirements at the moment - after all, the rules won’t come into being for another two years. In this time, fund managers’ business models might change – it would be a somewhat redundant exercise for a manager to prepare for this legislation if they do not maintain their existing investment strategy.

“A lot of time and effort can be spent dealing with issues that are too far ahead. We are investing time internally in reviewing the legislation. We will work out solutions and gap analysis and identify what the challenges will be. We will then bring this advice to our clients at the right time rather than have them spend money on something that is two years away. We don’t want our clients to be running up pointless costs. Some people out there are stirring the industry to do things. We are pragmatic at the core and that pragmatism means we work hard behind the scenes. As things stand, our current focus is in the Dodd Frank Act and registering with the Securities and Exchange Commission (SEC),” stresses Burke.

While some people may disagree with this tactic, IMS has been remarkably effective in providing solid service to clients in the run up to previous legislative changes. Burke points out they helped implement MIFID for clients in a highly efficient manner. “We did MIFID for hundreds of clients incredibly efficiently. We thought carefully about how to do it and designed the tools. We developed it for each of our firms. Our clients said it was a job well done,” he adds.

Furthermore IMS assisted numerous firms with the re-jigged Financial Services Authority’s (FSA) remuneration code that came into force at the tail end of 2010. The original proposals back in July 2010 stunned the industry and contained a number of unpopular provisions on areas such as bonus deferrals and share-based payments. This posed a challenge to IMS.

“The key thing was trying to hold people back from panicking when the original provisions came out in July. We told our clients that things would not turn out as bad as they looked. We tried to keep the cork in the bottle and gave them reassurances that the final outcome would be more proportional,” says Burke. However, he acknowledges the FSA still has a lot of questions to answer including whether or not remuneration will apply to limited liability partnerships, for example.

With all these issues to contend with, smaller hedge funds and start ups will be hit disproportionately by these requirements. IMS, however, provides a platform for these firms which the managers can operate under until they are fully fledged. Operating a fund on IMS’s platform can help a fund register with the regulatory authorities much more quickly. It can take some funds up to six months to register – occasionally this can hamper progress significantly. “We can get people in business in a month. This helps those managers who don’t have time to wait around,” adds Burke.

As regulation piles on, hedge funds and other buy-side firms are going to have to confront many challenges in terms of how their operations are managed. Outsourcing is just one option. But IMS does stand out as a safe port of call for these companies to go to for compliance assistance.

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