Compliance program of the sub-adviser: Overview, definition, and example
What is a compliance program of the sub-adviser?
A compliance program of the sub-adviser refers to a set of policies, procedures, and practices designed by a sub-adviser (a firm or individual hired to manage investment portfolios or provide financial services on behalf of another adviser) to ensure that they are in compliance with relevant laws, regulations, and industry standards. This program is aimed at preventing violations of rules, identifying potential risks, and promoting ethical conduct in managing client assets. The compliance program typically includes monitoring, reporting, and auditing practices to ensure that the sub-adviser adheres to applicable regulatory requirements, such as those imposed by the Securities and Exchange Commission (SEC) or other governing bodies.
Why is the compliance program of the sub-adviser important?
The compliance program of the sub-adviser is crucial because it ensures that the sub-adviser operates in a legal, ethical, and transparent manner, safeguarding the interests of their clients and investors. By having a robust compliance program in place, the sub-adviser reduces the risk of legal violations, financial penalties, and reputational damage. It also ensures that the sub-adviser is adhering to the guidelines set forth by the main adviser or asset manager, as well as regulatory authorities, helping to maintain trust in the financial industry. Additionally, a well-established compliance program can protect the sub-adviser from legal actions or disputes that could arise from non-compliance.
Understanding the compliance program of the sub-adviser through an example
Imagine a sub-adviser hired by a large investment firm to manage a portion of a mutual fund. The sub-adviser must comply with SEC regulations, industry standards, and the investment firm’s specific guidelines. The sub-adviser’s compliance program includes regular audits, reporting on investment activities, and ensuring that the investment strategies align with the fund's stated objectives. The program also includes training for employees to ensure they understand the legal requirements regarding client communication, investment practices, and risk management. If the sub-adviser fails to comply with these regulations, the investment firm or clients could be exposed to unnecessary risks, and the sub-adviser could face legal action or penalties.
In another example, a sub-adviser might manage a portfolio of international investments. The sub-adviser’s compliance program ensures that it complies with not only domestic regulations but also international laws, such as those governing foreign investments and anti-money laundering (AML) regulations. The program includes internal controls, regular compliance checks, and reporting systems to ensure that the sub-adviser is fully compliant with all applicable regulations.
An example of a compliance program of the sub-adviser clause
Here’s how a clause related to the compliance program of the sub-adviser might appear in a contract:
“The Sub-Adviser shall maintain a comprehensive compliance program designed to ensure adherence to all applicable regulatory requirements, including those set by the Securities and Exchange Commission (SEC), and shall regularly report to the Adviser regarding the status of such compliance. The Sub-Adviser agrees to promptly inform the Adviser of any material non-compliance or potential violations that may arise.”
Conclusion
The compliance program of the sub-adviser is a critical component for ensuring that investment activities are carried out in accordance with legal and regulatory standards. It helps protect clients' interests, minimizes the risk of legal violations, and ensures the sub-adviser maintains the integrity of their operations. By adhering to a robust compliance program, the sub-adviser can build trust with clients, avoid legal issues, and promote ethical practices in investment management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.