SAS 70
The SAS 70 is a "Statement of Accounting Standards", carried out on service organisations, originating in the United States and largely acquired, to date, by large financial institutions and banks. As a result, many of the major mutual fund administrators have participated in the SAS 70, carried out for their parent banks.
For those not familiar with the term "SAS 70", it is similar to the UK "FRAG 21" standard. The management of Custom House originally considered going through the SAS 70 process approximately 8 years ago, but decided it was not good value. This was not just because of the considerable expense and the disruption that the process caused, but also because our grass roots research indicated that very few managers and, indeed, investors in the hedge fund industry knew what a SAS 70 was, therefore, there did not seem to be any good value in proceeding with a SAS 70 at that time - but times change.
Moody's Management Quality Rating
Custom House chose to apply for a Moody's MQ ("Management Quality") Rating. In due course, Custom House was awarded a Moody's MQ BAA 1 (Investment Grade Equivalent) Rating and Custom House was proud to announce that it was the first Hedge Fund Administrator to receive this prestigious rating. As it turned out, Custom House was unique in this regard because, as a result of a change in management policy at Moody's, Moody's withdrew the service three or four years later and Custom House became not only "the first" but also "the only" hedge fund administrator to have a published MMQ Rating, although we are aware that at least one other hedge fund adminsitrator went through the process, but elected not to publish the result.
SAS 70 Benefits
In the ensuing six years, investment in hedge funds by large institutional investors had grown substantially and most of those institutional investors take considerable comfort from knowing that the administrator of a fund they wish to invest in has a SAS 70. Therefore, although a SAS 70 is by no means a "requirement" today, the management of Custom House believes that, for any hedge fund administrator who wishes to act for any fund targeted at institutional investors, it is not only a clear advantage to have a SAS 70 today, but it will be essential to have the SAS 70 within two or three years. Accordingly, Custom House, which prides itself on forward-looking innovation, engaged Ernst & Young ("E&Y") at the end of 2006 to perform a SAS 70 on the Fund Administration and Shareholder Services departments of CHI (then called "Custom House Administration & Corporate Services Ltd."). As a necessary by-product of this, the Company's IT department was also included in the SAS70 report.
Type I SAS 70
The process, which is divided into two parts, began early in 2007, and initially required CHI to describe the business functions within the relevant departments and to then detail all the controls in place for each function that would give 'reasonable assurance' that each function is operating effectively.
The auditor then performed a limited testing of such controls and gave its opinion on whether the controls give such 'reasonable assurance'. This is known as the Type I SAS 70, and was completed by the end of April 2007.
Type II SAS 70
The next stage, the Type II, involved significant testing of the controls, over a 6-month period. Accordingly, the auditor performed detailed testing of all the business and IT functions included in the Type I, typically testing 25 samples for each business function, across the whole "book" of funds administered by Custom House, picked at random by the auditor.
In the report that emerged from the Type II SAS 70 process, the auditor detailed the results of the testing performed, as well as giving its overall audit opinion based on the testing process.
The first Type II report, which was issued in December 2007, was issued without any qualification, which means that no exceptions were noted.
The Board of Custom House considers this to be a very creditable outcome, particularly given that the first year is known to be the most severe. Undoubtedly the experience was not painless and required CHI, at times, to assess its controls and, where necessary, to tighten them up.
Furthermore, the experience has undoubtedly benefitted Custom House because it was and is now able to tell existing and new clients that, CHI has the SAS 70 Type II, which clearly shows that, in the opinion of one of the four largest audit companies in the world, Custom House's controls are as good as, or better than, the controls of many of its competitors.
The SAS70 is an ongoing commitment and Custom House is pleased to be able to say that it received a "clean" Type II report in 2008 and expects to receive another clean report at the end of 2009.
Whilst it should be noted that, although the SAS70 has only been issued to CHI, Custom House has retained an independent auditor to visit its other adminsitration offices and that auditor has confirmed that every office complies with the same procedures and controls as CHI and, as such, they are all SAS70 compliant.
For further information on the SAS 70 process, including the benefits of attaining one, please click on the following link:
