Thursday, November 24, 2011

UK FSA Fines and Bans Hedge Fund Compliance Officer For Failure to Act with Care and Diligence

The UK Financial Services Authority has fined and banned from the financial services industry a hedge fund compliance officer for breaching Principle 6 of the FSA’s Statements of Principle for Approved Persons. Principle 6 provides that approved persons performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their controlled function. The hedge fund compliance officer agreed to settle the FSA action during the course of the investigation; and therefore qualified for a 30% reduction on her financial penalty.

In the wake of the collapse of Lehman Brothers, found the FSA, the investment strategy adopted by the hedge fund manager for the hedge fund resulted in losses totalling approximately 85% of the fund’s total assets under management. To conceal the losses, a senior employee of the fund manager entered into a number of contracts on behalf of investment funds managed by the fund manager for the purchase and resale of a bond whose legitimacy was questioned by investors. In addition, the hedge fund’s prime broker resigned as a result of its concerns about this bond.

The FSA said that the hedge fund compliance officer failed to consider the reasons for the prime broker’s resignation and, despite being aware of the investors´ concerns about the bond, failed to properly investigate those concerns or act upon the information. The FSA found that the compliance officer did not fulfill her responsibilities and therefore failed to act with due skill and care. She relied wrongly on another employee of the hedge fund manager and on her belief that external lawyers were instructed and would have acted on concerns as appropriate.

The FSA said that the hedge fund compliance officer should have ensured that the concerns raised were urgently considered and investigated. If these investigations had not confirmed that the bond was a legitimate financial instrument, the compliance officer should have notified the FSA that a person may have committed financial crime. The compliance officer did not take any such steps, but instead relied on her mistaken belief that external lawyers had advised on the bond, without having seen this advice and without confirming whether any such advice had been obtained.

Tracey McDermott, acting FSA Director of Enforcement, said that the compliance officer’s failure to challenge a colleague and investigate and act on the information she received resulted in the hedge fund manager and the FSA being unable to take appropriate action. The hedge fund compliance officer took far too narrow a view of her role as a compliance officer, said Director McDermott, and failed to understand the importance of her role and the wider regulatory obligations it brings.

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