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News August 14, 2006 Issue

The Basics of Training

As weíve heard in speech after speech, itís not enough to have a compliance manual. The policies and procedures in that manual must be understood and implemented throughout the firm.

Which brings us to training.

Training can be used in a general sense to build a culture of compliance. It also can be used to confirm that employees understand what, exactly, their firmís policies and procedures require them to do.

As OCIE director Lori Richards explained in an October 2004 speech, training helps convey the "tone at the top" by communicating managementís expectation that employees will operate ethically and in a manner that is consistent with the firmís fiduciary and legal obligations.

Willkie Farr partner Barry Barbash reported a recent uptick in interest in the area. "More and more advisers are trying to do training," he said, noting that his firm has been asked to conduct a number of training sessions this fall. "There has been so much focus in the past few years on compliance," he explained. As a result, people are concerned about liability and "donít want to trip up."

While Barbash said that "all kinds of advisers" are interested in training, he suggested that hedge fund advisers in particular may want to ramp up in this area. While many hedge fund managers may operate under the belief that disclosure is key, he said, the reality is that hedge fund managers are not "lightly regulated" and actually are subject to a range of substantive regulation. The "perception," he said, is that "hedge fund managers have a lot to learn in terms of law and compliance under the Advisers Act and similar federal statutes."

A firmís CCO can personally benefit from having a well-trained workforce: The better-trained a firmís employees, the more a CCO can delegate oversight responsibility. "As much as possible," the CCO "wants to be in a monitoring role, as opposed to a role where he or she is implementing the compliance procedures," noted Sutherland Asbill & Brennan partner Bibb Strench. "To achieve this goal, the CCO is obviously going to have to train either people within the compliance group or operating personnel." The greater the number of employees who can "shoulder those responsibilities, beyond the CCO," said Strench, "the more likely that the compliance program is going to be effective."

There are two broad categories of compliance training: First, the general compliance training that is provided to virtually every employee within the firm. The classic example, of course, is code of ethics training, particularly as provided by firms who define "access person" to pick up every single employee.

Other general compliance training topics that may be discussed on a firm-wide basis include insider training, information-sharing/privacy, disaster recovery, e-mail communication and retention, and recordkeeping. In addition, non-securities matters such as sexual harassment and communications with the media may be covered.

The second category consists of specialized training, which is geared towards a subset of employees involved in particular functional areas. Training on advertising compliance, brokerage selection processes, and investment guideline compliance fall within this category.

Both types of training ó general and specialized ó can be conducted on an initial basis (i.e., when the employee joins the firm), as well as on an ongoing basis (i.e., at an annual compliance meeting).

Many firms also conduct "ad hoc" training to address compliance issues as they arise. For example, said Strench, "if people are not timely submitting code of ethics reports, that might warrant a special training session just on code of ethics."

IM Insight spoke with two CCOs about their training programs. According to ProFunds CCO Victor Frye, new hires at his firm spend "over a day" in employee orientation, where they meet with various members of management and receive a copy of the employee handbook. Compliance training, he said, is part of that orientation. Highlighted topics include code of ethics, personal trading, e-mails, and insider trading, among other subjects. The basic requirements in the firmís compliance policies and procedures "are communicated at the outset," Frye said. New employees "are asked to acknowledge those requirements at the start of their employment."

Frye said that ProFunds schedules ad hoc training in instances where past training appears to have been inadequate, when the firm launches new business operations, or where the firm sees "infractions or trends in infractions." Also, he said, his group solicits feedback from the various supervisory groups on training, as part of the firmís risk assessment process.

In general, he said, ProFunds tailors training "based on a needs approach." For example, Frye noted that his firm has a policy against using inappropriate language in e-mails. If the firm detects an increased amount of e-mail traffic containing inappropriate language in a particular group, he said, "then we conduct new training with that group." Training also may be conducted on an individual basis, he added. And, on occasion, training may be accompanied by a reprimand.

Judy Werner, who serves as CCO of Gardner Lewis, reported a similar process. New employees participate in a "sit down meeting the CCO" and are given "a copy of all of our policies and procedures." While Werner goes over the firmís code of ethics and other technical compliance issues, she also takes the opportunity in that first initial meeting to emphasize the firmís role as a fiduciary. "I try to impress upon [the new hire] that the clientís interest always goes first," she said. "Thatís really the basis for everything that happens in the code of ethics." New employees are cautioned that "in everything they do, itís important to follow all the policies and procedures of the firm."

Werner said she shoots for conducting ongoing training twice a year. "We try to do something at least semi-annually," she said. "It depends on whether there are new things coming up." For example, Werner said that she scheduled new training sessions after the firm made changes to its entertainment policy.

When conducting training for a particular area, Werner concentrates "more on the employees that are involved." For example, when it comes to her firmís entertainment policy, she may be more inclined to focus on the firmís traders or its investment team. "Our back office doesnít get entertained all that often," she noted.

Paul Hastings partner Julie Allecta suggested that advisers consider holding an in-person meeting, at least once a year, to highlight "key aspects of the important policies." By holding an in-person training session, "you know you have peoplesí attention." In contrast, a CCO who merely distributes documents and requests signed certifications (stating that the employee has read the documents) may not be as confident about the employeeís actual knowledge and understanding of the materials.

Allecta also pointed out an additional benefit of in-person training sessions: "You can get suggestions." For example, employees may pipe up and ask "Why do we do this and that? It can really be done in one step." Or, she said, employees may announce that a particular procedure "doesnít really work" and explain why. In-person training, she said, allows compliance and operations personnel "to get some immediate feedback from each other about improvements that can be made." For these reasons, she said, most CCOs prefer to conduct in-person training.

And, in fact, both Frye and Werner reported that they typically conduct training "face to face" through in-person meetings. "Weíre a small shop," said Werner. "Weíre all in one building." Conducting in-person meetings "gives everyone the opportunity to ask questions." And, she noted, in-person meetings are "more interactive" which "makes it a better learning experience for everyone."

Allecta noted that some firms provide periodic written communications, such as a "compliance tip of the month" or timely reminders of key compliance dates. However, she cautioned, "you have to draw a line carefully" between providing helpful guidance and "too much communication." And, she added, "a lot of this will vary on the size of the shop. If you only have twelve people, itís going to be a lot easier [to be] much more informal." In a shop with 800 people, "you have to do more formal training."

Other training tips:

Keep it practical. OCIE director Richards urged CCOs to use examples that employees will understand. When conducting training sessions, she explained, "generalities will not communicate the importance of the mandate to them and it will not be clear to them how they are to live up to these expectations in their daily work."

There are new employees and then there are new employees. Thereís a big difference between a new hire that has just left a job at another advisory firm and a new hire that is completely new to the investment management industry. "If they havenít already worked in the industry," warned Allecta, there will be more ground to cover in training. Questions such as "My wifeís trading is covered?" tend to come from employees who are brand-new to the industry, she said. And, she cautioned, "a lot of the mistakes and the misunderstandings" come from such employees.

In contrast, employees who come from another advisory organization may be more familiar with applicable requirements.

Experienced employees need training, too. As regulatory requirements change over time, consider whether seasoned employees need additional training. For example, Werner cautioned that some long-time employees may view the code of ethics primarily as a personal trading procedure and, unless trained, may not fully appreciate the breadth of the newer codes of ethics.

Donít forget the independent contractors. At ProFunds, even independent contractors are put on notice of the firmís expectations. While they may not be subject to the full-blown employee orientation, independent contractors are informed that they will be operating in a "restricted environment" and are made aware of applicable limitations on their activities, said Frye. Moreover, his firm ensures that agreements with outside contractors specify that they are subject to the firmís compliance restrictions when they are onsite.

As an additional check, Frye said that his firm conducts due diligence and appropriate background checks on independent contractors who are going to have access to systems and information. "Controls are put in place before they have access since they are not going to be subject to our supervision" as employees, he said.

Keep track of what you do. Keep a running log of your training activities, so that you can count those activities toward your annual review. Werner reported that she tracks her training activities in her annual review matrix. When conducting in-person training, she typically utilizes a sign-in sheet, which later provides a record of "when we met and who attended the meeting."