Escalation procedures – people don’t do their jobsPart of what they are assessing is risk awareness and attitudes toward riskWhat are you doing differently in the wake of Madoff, Lehman, Stanford, Bear, etc.?
Conflicts – examples – personal trading, giftsWas Bernie Madoff’s auditor REALLY independent?Consider registration – and behave like you areAppropriate discipline for violations, especially compliance
Obtain written representation from investors that they understand the risks of investing in the fund:Receipt and understanding of the PPM and organizational documentsHave the understanding and knowledge to evaluate the merits and risks of their investment and can bear such risksUnderstand the terms of investment including minimums, withdrawals rights, liquidity provisions, allocation, fee structure, etc.Pricing If new instruments purchased that require additional methodologies, develop new policies at the time of purchase Multiple sources of prices for non-exchange-traded instruments
Adequate #s Based on volumes, level of automation, need to segregateSegregation of duties:Trade settlement is handled by non-investment staffIdeally, trade settlement is not handled by reconciliation or fund accounting staff eitherTrade confirmations sent directly to trade settlement staff – not investment teams 2 staff for wires (do electronically) AND free deliveries Pricing staff should not report into investment teams
With which legal entity have you contracted?Who are the sub-custodians?Note that changing auditors, etc. can raise red flagsDue diligence should include:CreditworthinessTheir procedures, policies, staffing, consistency, DD on THEIR vendorsPeriodic review of AML practices by third-party providers where appropriate
Who should be there?Ideally, one person is there all day (salesperson)Identify possible points where conflicting info might be providedEnsure day remains on schedulePose questions to subsequent participants or backdrop on what was coveredCoordinate follow-upPre-screen follow-upThey will want to meet staff – at least handshakesEnsure someone is still managing the money Assess skills of internal people to meet prospects and clients (should be part of your hiring process)Knowledge and backgroundJob functionAbility to stay ‘on message’Ability to avoid saying or doing something stupidPeople skillsPolishWell spokenAppearance/dressTable mannersFeed them – but not lavishly!Time for breaksPossible tourBe careful about leaving papers aroundGreat opportunity to have new staff learn about the firmConsider a signed NDA before too much is revealedMake sure your processes and procedures are clear and consistently appliedAnd review them regularly – with updates as necessaryMinimum annual reviewReview when errors occur – to keep from happening againReview then others’ errors are announced in the marketplaceReview when you launch new products, systems, etc.Review when you change staffing levels – up or down
Top 10 List for Mastering Operational Due Diligence