Compliance, Controls and Risk Management In Hedge Fund Administration

Good afternoon Ladies & Gentlemen,

 

On reviewing the programme for today, two things stand out ? or they stand out to me, at any rate.

 

Firstly, the vast majority of speakers and topics are more relevant in the context of what I would describe as the more traditional fund ? i.e. Unit Trusts, Mutual Funds and similar retail investment products.

 

My company, Custom House, specialises exclusively in Alternative Investment and Hedge Funds.  We do not handle any Mutual Funds, Unit Trusts or, in fact, any retail products.  The minimum investment level per subscriber in the funds that we administer is at least one hundred thousand dollars and often higher ? indeed, in once case, very much higher at ten million and that fund has a ?Feeder Fund? which, itself, has a minimum investment  level of one million dollars.

 

So firstly, I must tell you that my remarks today on compliance, controls and risk management are made in the context of the administration of the more esoteric Alternative Investment and Hedge Fund products. 

 

The second point I have to make is somewhat embarrassing, because it relates to the second bullet point published about my presentation in your programme.  This reads:

 

?Analysing the relative benefits of the various third-party administration models?

 

I fear I must have misread my brief and apologise to you for that because, frankly, I have no idea what this means.  I am not aware of the term ?administration models? in the context of administering Alternative Investment and Hedge Funds, or any other funds, for that matter.  As far as I?m aware, administrators may use different systems, they may use different technology and they may provide differing levels of service, but it would never occur to me to apply the term ?model? to any part of the administration process.

 

The first topic of my presentation is

 

?How And Where Third Party Administrators Add Value And Reduce Costs?

 

In the Hedge Fund industry, I suggest that the main advantage that the third party administrator brings to the table is the comfort that is provided to investors, if the administration of a fund in general, but especially the calculation of the Net Asset Value of that fund, is being carried out by an independent third party.  That is independent from the fund?s Manager.

 

For those of you who are not familiar with the Hedge Fund industry, this comment may seem rather extraordinary, so I should briefly explain.

 

The majority of Hedge Funds, of which there are now estimated to be close to 10,000, are established in the United States as Limited Partnerships.  The General Partner is usually the Hedge Fund Manager who also, usually, handles the administration of the Fund and produces all of the partnership accounts, reports and statements.  In the vast majority of cases, there is nothing wrong with that and, historically, the vast majority of US Hedge Fund accounts and reports have been spot-on. 

 

However, as those whose knowledge of this market is based on the somewhat sensationalist, and, frankly, ill-informed, articles in the press over the past couple of years, including, rather disappointingly, a recent article in ?The Economist?, will know there have been a number of scandalous frauds involving US Hedge Funds.  I would point out, in passing, that these frauds represent a tiny percentage of the universe of Hedge Funds out there and an even smaller percentage of the asset pool invested in those Hedge Funds, although these small percentages seem to be in inverse proportion to the column inches that the scandals apparently merit in the press. 

 

Having said that, these scandals have honed investors? senses and they now want to see that the funds they invest in are administered by an independent third party administrator.  It is with this in mind that I believe that the appointment of a third party administrator can add immeasurable value to a fund, if it means that it will retain investors in the fund or, indeed, attract new investors to the fund.

 

The analysis of costs and value, however, as measured in dollars and cents is an entirely different matter, in terms of ?added value?.  For a Hedge Fund Manager, setting up his first fund, the cost advantages of appointing a third party administrator are obvious and it?s not a matter of dollars and cents, it is a significant business decision. 

 

Firstly, until the fund manages to grow in size to, say, a hundred million dollars, the actual cost of setting up an administration facility, which involves renting more space, employing qualified staff, acquiring the specialised technology and providing the managerial resources required to ensure the efficient self-administration of the fund, can be almost prohibitive and will not compare favorably with the fees charged by many of the specialist Hedge Fund administrators. 

 

Hedge Fund Managers may also have problems in identifying what proportion of their operating costs should be deemed part of the Hedge Fund Manager?s own overhead and what proportion should be allocated to the fund.  If a third party administrator has been retained, then the allocation is clear and simple ? the fund pays it all.

 

Obviously, once the fund has reached a critical mass, the cost ratios change and the attraction of a third party administrator may decline.  However, it is also likely that, as the fund grows, the fees charged by the administrator will also be volume sensitive.

 

So, it can be seen that the decision to use a third party administrator can often be based on somewhat marginal factors and, therefore, can be swayed by other considerations, such as the perception of independence that I have already mentioned, and risk transfer.  By this I mean transferring the risk, and resulting liability, represented by, for instance, the possibility of expensive errors, from the Fund Manager to the third party administrator ? or that administrator?s insurance company.

 

One area where dollar costs can be a serious factor is when a Fund Manager, who has hitherto administered the fund that he manages, decides, perhaps because of investor pressure, to appoint a third party administrator.  In these circumstances, the Manager will already have made a substantial capital investment into his own administration department and, in all probability, that department and the technology purchased, may have proved efficient at the job they were doing.  In choosing to outsource the administration, the Manager may have to decide to write off the capital investment and let some staff go.  And, as we all know, in Europe at any rate, that can be a very expensive way to cut costs. 

 

Often in these circumstances and in order to avoid these write-offs, the Fund Manager will decide to continue preparing the Fund?s accounts and calculating the NAV, but will also ask the third party administrator to fulfill the function of ?verifying? the figures produced by the Fund Manager and, of course, to do that for a nominal cost.  This is, potentially, a very dangerous area for an administrator and any administrator who agrees to ?verify? such numbers should, in my view, still replicate the whole accounting process, in-house, using independently sourced data, which, of course, cannot be done for a nominal cost.

 

I will now move on to the third topic in your programme, which is:

 

?Avoiding Liability and Establishing the Proper Controls through Risk Management?

 

Historically, the phrase ?Risk Management? has meant, to most people, the management of risks relating to a fund?s portfolio and investment strategy.  However, post Turnbull, it now has a much broader meaning, which is almost unlimited.  For example, the decision to appoint a third party administrator in order to transfer the risk (and resulting liability) of potentially expensive administrative errors, from the Fund Manager to that administrator, is itself a risk management decision, totally unrelated to the investment activities of the fund and Fund Manager.  The risk management and the controls necessary to mitigate those risks now become the problems of the administrator.

 

Sadly, the transfer of risk is not as simple as that, because, in today?s litigious world, you can never fully transfer a liability such as this, unless you totally withdraw from the picture.  For example, in the case of the Manhattan fraud, investors sued everyone, with varying levels of a justification.  I suggest the main criteria was the ?depth of pocket?, as much as the actual responsibility and, as a result, each of the administrator, its affiliate company, the auditor and the prime broker of Manhattan, have been sued.  But that, I fear, is a risk that you now have to accept in most businesses, as soon as you put your tie on in the morning or, in today?s liberal society, your Ralph Lauren Polo shirt.

 

So what are the risks that are assumed by an administrator and how can he control them?  

 

And from the Fund Manager and investors? point of view, what can they do to satisfy themselves that those risks are being properly managed?  Because, if they are not managed properly by the administrator, then the Fund is at risk.

 

For the Fund Manager and investor, its all a matter of due diligence, but what questions should they be asking and what should they be looking for? 

 

Those of you who are members of AIMA - which is the Alternative Investment Management Association, of which I am Deputy Chairman ? that is my only corporate plug of the day ? may be interested to know that the Due Diligence Committee of AIMA is in the latter stages of producing a Due Diligence Administrator?s Questionnaire, which is intended to be a guideline for members? use when selecting an independent administrator for their Alternative Investment or Hedge Fund.  It will not be a definitive document, it will only be a guideline  because ? and this is another example of risk management ? we, at AIMA, cannot take the risk of making any definitive statements or recommendations, because, if we have missed one question and a user of the Questionnaire finds that the administrator doesn?t perform, then that could result in AIMA suddenly assuming, albeit as the result of an altruistic action, a legal liability. 

 

Frankly, I sometimes wonder why we get up in the morning, if we have to be that cautious, but of course, awareness of a risk is the first step in controlling that risk. 

 

So what should you be looking for in an administrator and, particularly in a Hedge Fund administrator? 

 

Well, to start with, you would look for the same things that you would look for with regard to anyone to whom you intend to give responsibility for your assets ? evidence of stability, financial strength, integrity, reliability.  This can be done by getting all of the statutory and financial information on the administrator, as well as references and, indeed, you should ask for references from existing clients of your prospective Administrator.  You should then follow up on those references, both in writing and verbally.  I say verbally, because anyone asked for a reference, today, is liable to be more than a little circumspect about what they put in writing ? again, a risk management policy ? but they are likely to be a little more relaxed and open if you are speaking to them ?off the record?. 

 

You need to check if the administrator is regulated and by whom and then make an assessment as to whether that regulator is competent and the oversight of that regulator is adequate - which may be a reflection of the jurisdiction in which the administrator operates.

 

Having established whether the administrator is an organisation you would feel comfortable working with, then you have to decide whether the administrator is capable of doing the job that you are going to be paying for and particularly its capabilities with regard to your particular fund product.

 

You should make a site visit. 

 

You need to know numbers of staff, qualifications of staff, the management structure, not only at the top, but also at middle levels.

 

How technically competent is the company?  What systems do they have and how do they work?  Many institutional investors send their own back office Systems Manager to Dublin to review our system and that makes consummate sense.

 

The major risk assumed by an administrator of a Fund is in regard to the calculation and publication of the NAV and NAV per Share, which becomes the dealing price for subscribers into and redeemers out of the Fund.  Any single error in the calculation of an NAV will, of course, affect the share-dealing price, not only for the month in which the error was made, but for every month forward until the error is discovered and corrected, which may only be at the time of the audit.  And, of course, if the error is a systemic error, such as an incorrect method used to calculate the value of a type of asset, such as a complicated derivative, for example, then the miscalculation of the NAV could be exacerbated each month up to the audit ? which could be 15 or 18 months later, if the error was made in month one. 

 

Once the error has been discovered and rectified, the NAVs for the preceding months have to be restated.  This will be, at best, extremely embarrassing with regard to subscribers, who are told that the number of shares they purchased has to be adjusted because the NAV at the time of purchase was incorrect.  It will be embarrassing, not only for the administrator, but also for the Fund Manager, who, as far as the investors are concerned, appointed the administrator and is therefore responsible for its faults.

 

The major liability, however, could be in the context of redemptions that have been agreed and paid out, if the NAV had been overstated and those redemptions had been overpaid.  It is often very difficult to persuade a shareholder, who has been paid for his shares, to repay a portion because of an error.  And that becomes increasingly more difficult if the fund has underperformed and the investor lost money.

 

The other area of potential liability arises with regard to trading losses, whether actual or ?Chinese? losses,  ? i.e. profits that could have been made, but weren?t ? that occur as a result of the Fund being over, or under invested in the market because of incorrect NAVs and accruals..  This, of course, can be exacerbated with regard to Alternative Investment and Hedge Funds, where there is often a substantial element of leverage involved.

 

If possible, you should enquire about the procedures and controls that the administrator has to ensure that the administrator is capable of doing everything it claims and that the risks of error are, as far as possible, eliminated.  Frankly, it is unlikely that many Fund Managers, or investors, will have the opportunity or inclination to do an in-depth check of the actual procedures and controls employed by an administrator, other than those that are shown within the specification of their operating system.  Therefore, the administrator should be asked whether they have had their systems audited, from a risk and control perspective, by a firm of auditors - preferably one of the ?Big Five? - and, if so, whether the administrator is prepared to show a copy of the report produced by that auditor.  Of course, if the administrator has a SAS or FRAG report available, then that will answer most, if not all, the questions that should be asked. 

 

Many of the controls necessary may be carried out automatically by the administrator?s system, thus, eliminating many manual checks. 

 

Another risk area is fraud.  In this context, one of the basic questions that should be asked is whether the administrator obtains its information, with regard to both the investment transactions carried out by the fund and the prices utilised for the valuation of the portfolio, from an independent source and, preferably, electronically, to reduce the risk of forged or amended faxes ? the ?Manhattan syndrome?.  The prices should be independently verified, unless the source is also independent ? Bloomberg or Reuters, for example.  The automation and the checks and controls involved are of paramount importance.  Our system will not permit an administrator who has just entered the details of a particular transaction into the system, to continue working on that fund until his Team Leader or Supervisor has authorised that entry. 

 

You should also satisfy yourself that third party payment procedures are tightly controlled and that the Manager is not able to make any such payments without the approval of the administrator.

 

One thing that investors, in particular, should be aware of is that administering an Alternative Investment or Hedge Fund is not the same as administering, what I have described as, the more traditional funds and the skill-sets of a mutual fund administrator and a hedge fund administrator can be quite different.  This is largely because the structure of Hedge Funds is different to traditional funds and, because Hedge Funds are generally structured for Professional and Sophisticated investors, they are not hampered by some of the regulations that apply to retail funds.  In fact, it may surprise some of you to hear that US Hedge Funds are almost totally unregulated. 

 

There are many varieties of both the structure of Hedge Funds and methods of charging and calculating the fees payable to the service providers and particularly the Investment Manager.  The real complications come into the fee calculations with regard to the performance fees, which are usually calculated as percentage of the profits generated by the Fund Manager, but which may also be subject to certain benchmarks that have to be achieved, before any performance fee can be levied.  Those complications are exacerbated enormously in the context of ?Equalisation?. 

 

I understand that, in the traditional fund industry, the term ?Equalisation? relates to the apportionment of capital and income that is allocated, upon a redemption out of a Distributing Fund.  However, in the Alternative Investment and Hedge Fund industry, the term ?Equalisation? has a totally different meaning and refers to the accounting process used to ensure that not only is the correct performance fee paid to the Investment Manager, but also that it is allocated equitably between all investors.

 

In order to understand why this is such a difficult problem for administrators, I?m going to take a minute to try and explain why Equalisation is necessary and I ask those who are familiar with the term to bear with me. 

 

The common justification for Equalisation is to avoid what is known as the ?free ride?.  This occurs if the fund increases in value, with the result that, at the end of a particular period, an incentive fee is paid to the Manager.  The Manager will not be entitled to receive any additional incentive fee until he generates more profits, as reflected by an increase in the NAV per Share of the Fund ? above the ?high water mark?, the level at which the last performance fee was paid.  If, however, the NAV of the Fund declines, then the Investment Manager will have to wait before he gets paid a further performance fee. 

 

Should a new investor subscribe for shares on the ?dip?, that investor will get a ?free ride? on any increase in value, from the lower subscription price up to the ?high watermark?, which is the point at which the Investment Manager, once again, becomes entitled to receive performance fees.  The ?free ride? refers to the fact that this new investor would not have paid a performance fee on any profit generated by a rise in the NAV per Share from the purchase price to the ?high watermark? level.

 

In order to eliminate this anomaly, one of a variety of Equalisation accounting methods is used, which will enable the Fund to charge each individual investor the incentive fee that accurately reflects the performance on each investor?s account.  Obviously, this is not necessary for partnerships where capital accounting is used, however, it is essential in fund companies that issue shares.

 

It is not only the ?free ride? syndrome that justifies the utilisation of an Equalisation accounting method ? if it was, many Fund Managers would ?bite the bullet? and not require Equalisation to be applied.  This is because Equalisation is a very complicated and, frankly, investor unfriendly process.  The accounting methods used can be very difficult to understand and the process involves adjustments and changes to an investor?s holdings.  Quite understandably, investors, who don?t understand how their NAV is being calculated on why their shareholdings change, are often suspicious and concerned that an error has been made ? or worse. 

 

Unfortunately, if there are subscribers into a fund at intervals between the launch and the first performance fee payment date, or between two subsequent performance fee payment dates, then Equalisation should be used to ensure the equitable allocation of the performance fee, regardless of whether the value of the fund rises or falls.  It is a mathematical fact that, it is only by applying an Equalisation method, that you can avoid a situation where one shareholder effectively subsidises another shareholder. 

 

I do not propose to go into the full mathematics or explanation of this today, but if any of you want to follow up on this, I will be delighted to send you a paper I have written on this tortuous subject, which I hope makes it clear.

 

The reason for bringing Equalisation into the subject of risk management and controls is that a number of administrators, who have to adhere to one of the Equalisation methodologies, do so using a spreadsheet system, which involves manual entries and manual calculations. 

 

This brings us around to the whole subject of the technology used by an administrator.

 

Historically, Hedge Fund administrators tended to use, what I have described in the past as a ?multiplex system?, which means using several independent systems or modules for processing particular parts of the administration function.  This could include a shareholder services module, which is separate from the securities transaction module, which would be separate from the fee calculation module and the Equalisation module and the latter two modules often utilise spreadsheets.  It doesn?t take a genius to realise that there is huge room for error in transferring information from one module to another and, in the case of spreadsheets, those ?error zones?, as I call them, are multiplied every time the information is transferred from one side of the spreadsheet to another.  That risk is then multiplied all over again if any changes need to be made with regard to a price, or number of shares, or other variable, which may have been misposted in the original calculation. 

 

A number of administrators of Hedge Funds now have systems, which are largely, or totally automated, including the calculation of the Equalisation process and such automation eliminates many of the ?error zones?.  Therefore, it is important to know whether the selected administrator has an automated administration system that eliminates those errors and, if not, whether there are suitable checking procedures and controls in place to ensure that the non-automated calculations are accurate. 

 

We recently had an Internal Controls Review done by Arthur Andersen (as the first step in obtaining our own SAS 70 or FRAG report) and, in the process, identified what were deemed to be the 27 primary risks of an administration business and, simultaneously, assessed the controls and procedures that we had in place to contain those risks.  It is fairly horrifying to realise that, on analysis, the total number of risks that were identified was closer to 50, but most of those additional risks related to the more obvious corporate risks that would apply to any business ? that is not specifically to the fund administration business - such as smoke alarms and other health and safety matters.  I?m not saying that they are not important, but they are not specifically relevant to an administrator. 

 

Out of the 27 risks that were relevant to the administration functions of the company, I intend to highlight two today, over and above the two primary risks, which I have already referred to, namely errors in the calculation of the NAV and ensuring that sanctity of the information, upon which those calculations are based, by showing that has been obtained from a ?proper? source and in an acceptable manner. 

 

The two additional risk areas that I intend to comment on are ?Money Laundering and due diligence with regard to prospective investors? and, a topic that is of particular relevance after the horrifying events in New York two weeks ago, ?Business Continuity?, or what used to be referred to as the ?Disaster Recovery Plan?.

 

The money laundering risk is a legal and regulatory risk that is assumed now by everybody in the investment and financial services industries, because failure to comply with money laundering regulations is a criminal offence.  Therefore, although we, as an administrator, (and particularly those in our shareholder services department) are obliged to fulfill our own money laundering procedures, with regard to the investors in the funds we administer, the Investment Manager also has his own obligations in that regard.  It must be remembered that, if anyone knowingly fails to report their suspicions of a money-laundering situation and it subsequently turns out that a money-laundering event had occurred, then that person, who failed to make the report, could be facing an enforced holiday.  But the risk of failing to fulfill money-laundering obligations is not solely that of criminal sanction on  the company and the individuals involved, but also one of reputational risk, should an embarrassing situation with regard to an investor in a fund blow up.  It goes without saying that, anybody associated with such a situation will, undoubtedly, be ?tarred with the same brush? by the press and, therefore, it is not just the fund that could suffer reputational damage, but also the Fund Manager and the administrator. 

 

The actual procedures to fulfill anti-money laundering due diligence are not particularly difficult to understand.  In fact, they are much more of a hassle because they are time consuming and sometimes involve asking questions that may upset investors.  But, as there is no option but to comply with the law, these things have to be done. 

 

I think it is fair to say that, despite the evangelistic ? even messianic - attitude of OPEC and FAFT, most, if not all, of the jurisdictions where offshore funds are commonly established now largely comply with international money laundering regulations and most sophisticated investors understand their obligation and understand why we have to ask them for notarised copies of their passport, utility bills, bank references, etc.  I was interested to hear when I was attending a conference in Monaco earlier this month that a resident has to produce two utility bills if he wishes to open a bank account in Monte Carlo.

 

The other area of risk management that I wish to cover today involves the establishment of a Business Continuity Plan.  As I have already said, Business Continuity used to be limited to a Disaster Recovery Plan and that, in turn, was often limited to just backing up all the computer data onto disk, or tape and storing that in a safe place.  My heart went out when I read the story of the company in the World Trade Center who operated on one of the upper floors in one tower and its back up was stored in a safe in the basement of the other tower. 

 

Our Business Continuity Plan, is now in the latter stages of being upgraded, which itself was a six month project, involves moving our Disaster Recovery unit from a small offsite facility, to a fully equipped, professionally managed site, approximately half an hour away from our offices.  The contract guarantees that, if we suffer a disaster, such as a fire or other major disruptive event, we will be up and running on the site, with all of our administrative staff sitting at functioning computer terminals, within four to six hours of the disaster occurring.  Obviously, this is not a cheap exercise, nevertheless, I think that the annual cost of retaining this facility could be less than the daily loss that could occur, if we were unable to service our clients.  Many Fund Managers and, indeed, investors, may be sympathetic, but they will not necessarily be amused, let alone quietly accept the fact that an administrator is unable to service them, unless it is for some universal unavoidable reason, such as the Nimda Virus, which hit the world last week, because it was designed to avoid many firewalls, taking advantage of the lack of controls on Web and Internet traffic into those sites. 

 

Therefore, in checking and carrying out your due diligence on an administrator (and, indeed, on your broker, fund manager, custodian and any other crucial service provider), you should discover exactly what steps they have taken to ensure Business Continuity. 

 

As I said, this does not just mean the Disaster Recovery Site, if any, but also their firewall protection, their data backup procedures ? our system will be backed up into separate servers at the offsite facility, every seven minutes ? as well as power supply and communications backup. 

 

The most difficult of these areas to protect is that of communications.  Power can be supported by generators and data backup can be supported by superior technology.  For the most part, anti-hacking and virus protection can be provided, however, attack by a virus is just another variation on terrorism and the protection you may have is only as good as the last identified virus.  If we had been the first people attacked by the Nimda, we might have suffered. 

 

We were hit by the Lovebug, which was, ironically, imported into our systems from Gateway, who had supplied all the hardware, which we had purchased in November 1999 to ensure that we were Y2K compliant.  That put us out of communication for a couple of days but, thank God, we were in good company, as many of our customers and other service providers were also hit. 

 

Our firewall programme and system configuration is designed to identify and block any suspicious or vulnerable mails, until they have been checked for bugs.  Furthermore, we consistently upgrade our firewall protection and, currently, our anti-viral programmes are updated every day ? the window of opportunity for a new bug to hit us before we have installed the latest protective programme for that bug is relatively short.  Having said that, of course, if are hit by a new bug, before any anti-viral programme had been devised, then we would be as vulnerable as the next person.

 

The fourth bullet point in the programme is:

 

 ?Improving Standards of Compliance and Performance Quality?. 

 

This is somewhat ambiguous, as it is not clear whether this refers to the administrator complying with the regulations that apply to its operations, or to the administrator?s ability to review the fund?s compliance with its obligations.  In the context of the administrator complying with its governing regulations, that comes under the 27 risks and compliance should be ensured by the controls and procedures that are in place and should have been identified and checked in the due diligence process I have already discussed.

 

The ability of the administrator to overview the fund?s performance and compliance with both the regulations that apply to the fund and the Offering Memorandum, or Prospectus, is another matter.

 

Compliance with investment restrictions, which relate to limits on holdings expressed as percentages of the Net Asset of the fund or percentage of the security in issue are merely, and I say ?merely? intentionally, a matter of programming the system and inputting the information to allow that programme to work.  Thus, the administration system should fulfill that oversight function. 

 

Whether the administrator is obliged to fulfill this function is a contractual matter and we act for quite a few funds, which specifically do not wish us to fulfill that obligation, as it will be covered separately by the custodian or prime broker.  It has to be said that we still keep an oversight, for our own protection. 

 

Obviously, the responsibility for ensuring that the fund complies with the Offering Memorandum and particularly the investment restrictions, lies with the directors.  However, with most offshore Hedge Funds, the directors will have delegated that responsibility to the Fund Manager and will have also incorporated a requirement that the custodian, prime broker or administrator review Fund Manager?s compliance and that requirement will be incorporated into the custodial, brokerage or administration agreement, as applicable. 

 

The administrator will have additional compliance matters to oversee, particularly if the shares of the fund are listed on a Stock Exchange and where the fund is obliged to comply with the requirement of certain regulatory bodies, including, inter alia, the Government authority in the jurisdiction in which the fund is domiciled, as well as the SEC or CFTC, if applicable.  For example, a commodity or futures fund managed by an American registered CTA must comply with certain CFTC regulations, including the provision of an audited financial statement within 90 days of year-end.  The Stock Exchange also requires the audited financial year-end statement and the unaudited half-yearly statements within a specific time frame.  As the administrator is responsible for liaising with the auditor and overseeing the auditor?s performance, it is the administrator?s task to ensure that those deadlines are met, if possible.

 

The administrator will also have responsibility to ensure compliance by the fund and all its shareholders with restrictions relating to ?Hot Issues? ? which, essentially, means IPOs or new issues.  SEC regulations prohibit certain investors, who may possibly be in an advantageous position, from participating in ?Hot Issues? and ?restrict? those investors.  The administrator is required to ?filter? the restricted and unrestricted investors and ensure compliance.