US sentencing guidelines: a cornerstone of hedge fund compliance practices
By Judith Gross
The following is a guest column for Complinet by Judith Gross, the principal and founder of JG Advisory Services. She develops compliance training for hedge funds, specializing in compliance and related topics, such as insider trading. The views expressed are her own.
Compliance regulations couldn’t get any more press coverage than they do today, given the almost daily raft of new SEC and Treasury rules. Putting the proposed and actual laws aside, however, have you ever stopped to wonder what the backbone of compliance law is?
The answer is the US Sentencing Guidelines, which were enacted in 1991 and later amended in 2004. These Guidelines set forth the sentencing recommendations for a variety of criminal offenses, including those for “organizations,” such as a hedge fund. Thus, if a hedge fund is convicted of engaging in criminal conduct, the court looks to these Sentencing Guidelines for a recommendation on penalties.
An organization can become criminally liable for wrongdoing whenever an employee commits an offense within the scope of his/her employment, even if the act was contrary to company policy. That’s right, the entire organization can be held criminally liable for that individual’s illegal actions. However, and this is a big “however,” the Guidelines have built into them the ability to mitigate a fine by up to 95 percent if the organization can demonstrate that it had an effective compliance program. This is assuming prompt reporting and non-involvement of high level employees.
So, what do the Guidelines tell us about compliance programs? They are actually quite specific, laying out seven key aspects of a compliance program that would presumably qualify an organization for mitigation credit. These seven criteria are:
Established policies and procedures to protect and detect non-compliance with regulations;
Management is proactive in overseeing the compliance program;
Employees who have engaged in some form of misconduct in the past are precluded from holding an authoritative position in the compliance program;
Effective communication of the compliance program to officers, so they can communicate and mandate them through the organization;
Monitoring and auditing of the compliance program and maintenance of an effective reporting system;
Effective enforcement of the program through incentives or disciplinary actions; and
The taking of appropriate steps to prevent recurrence once noncompliance is discovered.
The Guidelines’ compliance concepts have been incorporated into regulations in a variety of areas, including those relating to the regulation of investment advisers by the SEC. Those in hedge fund management might not be aware of many of the compliance concepts that are being implemented in their organization right now as they prepare to register with the SEC. An understanding of the importance of the compliance program in light of how they relate to the Sentencing Guidelines is a key tool for compliance officers.
Author’s note: A helpful summary of the Guidelines can be viewed by clicking here.
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