Discussing Operational Challenges Facing Fund Managers

It’s no secret that fund managers continue to face challenges when it comes to their back-office operations. EisnerAmper recently hosted a breakfast roundtable in its San Francisco office on the topic, which was attended by fund managers and operational specialists in the financial services industry.    Speakers included:

• Hannah Llaguno, chief financial officer, Cambrian Capital;
• Mina Iskander, chief operating officer/chief financial officer/chief compliance officer, Darlington Partners; and
• Jeffrey Stomski, partner-in-charge of EisnerAmper’s Financial Services Outsourced Services

The following topics were discussed:

Direct Hiring Versus Outsourcing

The first topic covered was a key dilemma faced by fund managers today: the decision whether to directly hire employees or to outsource to meet the needs of the fund’s operations.  In the past, management could afford to build out its back-office with specialists and support staff (e.g., traders, compliance, marketing, accounting, finance etc.).  For many managers this is not feasible in the current environment due to budgetary constraints.  This has led managers to look for candidates with a broader range of experience to assume a wider range of duties and responsibilities, which has proved to be challenging in the current market. 

Managers rely on consultants and outsourced service providers more and more to compensate for the shortfall of qualified candidates.  Operational tasks can be outsourced and completed piecemeal as needed as opposed to having full-time employees at a higher cost without the range of expertise to cover multiple functions. 

Then the discussion turned to the question: What if consulting and outsourcing costs were allocated to the funds as opposed to being borne by the management company?  The three main topics of conversation around this included:

1. Investor sensitivity to incurring those costs;
2. Investor expectations of how a fund’s back office should be staffed and structured; and
3. The terms of a fund’s limited partnership agreement.

A key point agreed upon by the panelists was the need to evaluate and understand the manager’s needs when outsourcing operational functions, i.e., have a clear understanding of the services that will be provided and agree upon the deliverables.  Even with operations being outsourced, management must keep in mind that it needs to understand and take responsibility of the work done by the service providers and consultants. 

Compliance

The roundtable then focused on upcoming operational challenges around compliance, which included:

• Tracking key dates and deadlines. Panelists suggested creating a compliance calendar to stay organized and keep the entire organization informed about important regulatory events.
• Keeping current with the constantly evolving regulatory landscape. Managers must constantly assess regulatory controls across their organizations and, where necessary, implement new controls, policies and procedures to meet regulatory changes.

As an example - the U.S. Securities and Exchange Commission (“SEC”) has recently adopted new reforms under the Investment Advisers Act of 1940 (the “Advisers Act”), particularly the Advisers Act Rule 206(4)-1 – the Marketing Rule.  Key provisions of the Marketing Rule address the adoption and implementation of policies and procedures, substantiation of material statements as well as performance advertising requirements.

• Planning for future regulatory changes and challenges. Recently, the SEC has issued proposed rule changes that could have a significant impact on all aspects of the offices of the chief financial, compliance and technology officers.  In a recent webinar, EisnerAmper took a closer look at the potential impact of the proposed rule changes: Impact of Private Fund Regulations on Finance, Tech & Compliance Managers. 
• Implementing technology and managing data. Managers are faced with the challenge of implementing technology and data management solutions that allow them to meet the demands of their current operations and regulatory environment as well as the flexibility to address future changes and challenges. 
• Electronic communication monitoring including email, instant messaging, text/SMS and other third-party applications is a current industry “hot topic.” The SEC recently charged several Wall Street firms with recordkeeping failures by these firms and their employees to “maintain and preserve electronic communications.”^[1] Under the Advisers Act Rule 204-2 - the Books and Records Rule, the charges were filed against affiliates of 11 financial institutions, including 15 broker-dealers and one investment adviser.  The investment adviser was charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940.

The consensus was that compliance remained an elevated point of concern due to the constantly changing regulatory landscape.  The need to allocate sufficient resources and emphasizing to management the importance of evaluating and minimizing risks remains a constant challenge. 

Takeaways

In summary, the panelists left the attendees with the following takeaways:

• Budgetary and resource constraints have led to an increase in outsourcing back-office operations;
• Management needs to clearly evaluate and define its operational needs when partnering with advisers; and
• Compliance remains a key area of focus. In an effort to mitigate regulatory risk, many managers have partnered with industry recognized advisers to assist in navigating the complex regulatory landscape.

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[1] U.S. Securities and Exchange Commission, SEC Charges 16 Wall Street Firms With Widespread Recordkeeping Failures, https://www.sec.gov/news/press-release/2022-174 (September 27, 2022).