The Challenges in Developing a Culture of Compliance

It even led Olympian Capital Management founder Michael Levas to deliver an impassioned speech about how the hedge fund industry is being unfairly targeted because of the sins of a few.

Scott Condron, CTO of BlackRock, says his firm's client-facing IT budget will largely go toward its Aladdin trading platform, growing its global footprint, and, most importantly, addressing regulatory demands.

"Probably the largest driver is our response to the regulatory challenges and how we can help our customers of that Aladdin platform meet some of those needs," he says.

Investors are clearly taking more notice than ever of how firms are answering this regulatory challenge. And, according to a new survey conducted by due diligence firm Corgentum Consulting, they're not entirely impressed with how hedge funds are answering the call.

Corgentum asked a swath of investors if they felt there was a culture of compliance at funds, or simply a desire to achieve technical compliance. In other words, are funds establishing a culture of compliance to improve their operations, or are they simply trying to meet the requirements by the deadlines?

Seventy-two percent of respondents say hedge funds are only seeking technical compliance.

"Hedge funds are so focused on technical compliance that they're just treading water because they're just trying to keep up," says Jason Scharfman, managing partner at Corgentum. "It's kind of counterintuitive; the results of increased regulation have not inspired increased oversight, just more technical rule compliance."

One hedge fund CTO at Waters USA told me that 2013 is going to be rough on the hedge fund industry. Maybe it's an election defeat hangover, but there is not a lot of optimism floating around about the New Year.

Scharfman says that even if a firm wants to change its culture, the current environment is not an easy one in which to right the ship, especially when you consider the loads of new mandates that keep flooding the industry.

"Now, what you're seeing is that people who want to devote extra resources to compliance can't because they're resource-constrained," Scharfman says. "Even if a fund has a dedicated compliance officer, they're now so focused with the technical rule of compliance versus pre-2008, where a dedicated compliance officer had a little more freedom to pursue what they thought was relevant to the firm."

Meanwhile, on the sell side, Adam Broun, CIO of the front office for Credit Suisse, says his team has struggled to meet compliance with Basel because in some instances they have to provide data for Basel II, Basel 2.5, and Basel III.

"The regulatory agenda dominates across the board, from our banking business to our wealth management and capital markets business," Broun says, referring to where the firm will focus its IT budget in 2013. "Because we're a Swiss bank, we have to be ahead of the pack on Basel III and that has required a lot of work on reporting systems, calculation engines and so on."

It's certainly an uphill battle, but as has been noted before, this is a fight that isn't going away.

What do you think? Which regulatory guidelines or deadlines are going to be the greatest hindrance for you and your firm in 2013? We can discuss off the record if you prefer. Give me a call at +1 646-490-3973, or send me an email at anthony.malakian@incisivemedia.com to share your thoughts.