Decorative Image: Emerging Managers Tree

Compliance Standards


Summary

PGIM Investments Compliance, in its continued effort to implement best practices in its due diligence reviews, has developed a set of minimum qualification standards to use as part of the selection process for investment advisers that PGIM Investments may hire. These criteria are not meant to be exhaustive. PGIM Investments Compliance’s due diligence process includes a multi-tiered analysis based on (i) the completion of an extensive compliance questionnaire; (ii) the review of policies, regulatory filings and other documents that provide insight into the firms’ compliance structure and control environments; and (iii) site visits and interviews with key personnel. Compliance reports are then created and vetted before distribution outside PGIM Investments Compliance.

After selection of the adviser to the Emerging Manager Program, PGIM Investments Compliance will monitor the advisers’ compliance program, in particular their compliance with stated investment guidelines. PGIM Investments Compliance will also monitor any interim and final compliance measures the adviser agrees to implement in order to meet the below qualification standards.

Significantly, the Emerging Manager Program gives PGIM Investments Compliance the opportunity to share best practices and counsel a firm’s compliance personnel in the early stages of development of its compliance program.



Minimum Qualification Standards


Standard #1: Compliance Officer (“CCO”) Serving Multiple Roles

A Chief Compliance Officer serving roles in the firm outside compliance may compromise the CCO’s ability to ensure adequate compliance. Rule 206(4)-7 of the Investment Advisers Act of 1940 requires that registered SEC advisers designate a CCO to be responsible for administering the policies and procedures implemented by the adviser. PI Compliance believes if a CCO has multiple roles within their organization that the additional role should not have any oversight over aspects of the investment process (such as portfolio management, trading, and/or research). Additionally a CCO with multiple roles should have adequate resources to be able to handle all his or her responsibilities.

Minimum Standard: A CCO must generally operate independently from the investment process. If the CCO has multiple roles, their responsibilities should not include portfolio management, trading and/or research.

Standard #2: Adequacy of Compliance Resources

The adequacy of compliance resources ensures that the CCO and his or her compliance team can effectively carry out their responsibilities. PI Compliance’s determination of adequate resources is based upon consideration of the following factors: (i) the firm’s commitment to compliance; (ii) the CCO’s experience, knowledge, and dedication; (iii) the support provided to compliance staff; (iv) access to an outside consultant and/or use of outside counsel, and (v) independent review of the compliance program.

Minimum Standard: Compliance should generally have at least one full-time dedicated employee, with either outside counsel or a consultant advising on compliance issues.

Standard #3: CCO Knowledge and Experience

Effective compliance depends in significant part on the CCO’s expertise and experience. Rule 206(4)-7 requires that an adviser's chief compliance officer be competent and knowledgeable regarding the Advisers Act. PI Compliance believes that a CCO should be in her/his position for at least two full years, have prior senior level compliance experience, and/or have access to an outside law or compliance consultant. CCOs that lack this experience or access to this assistance may be less effective at ensuring compliance.

Minimum Standard: CCOs must have adequate knowledge or experience on compliance matters, and/or have access to experienced compliance counsel or consultants.

Standard #4: Shared Office Space/Multiple Locations

Shared office space or multiple office locations without adequate supervision pose significant compliance risks. Shared office space with an unaffiliated company or persons presents the risk that non-public, confidential or private information could be inappropriately shared between personnel of the respective firms. Multiple office locations without a compliance presence increase the likelihood of compliance problems at those locations.

Minimum Standard: Shared office space or multiple locations present compliance risk which needs to be adequately addressed, in consultation with PI Compliance, prior to selection of the adviser.

Standard #5: Culture of Compliance

An investment adviser’s culture of compliance should emanate throughout the firm and convey behavior that meets or aligns with client expectations. This means establishing, from the top of the organization down, an overall environment that fosters ethical behavior and decision-making. It means instilling in employees an obligation to do what’s right, so that when employees make decisions, they are guided by an ethical culture that reinforces doing the right thing.

Minimum Standard: Senior management must establish a culture of compliance and senior management must understand and support compliance’s role and responsibilities.

Standard #6: Adequacy of Policies and Procedures

Effective compliance is established through robust compliance policies and procedures. Rule 206(4)-7 requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940. If an adviser has not developed, implemented and annually reviewed these policies and procedures, there may be risk with respect to (i) the adequacy of the firm’s compliance; (ii) the tone from the top of the firm; and (iii) a higher likelihood of compliance problems.

Minimum Standard: The adviser must have formal written policies and procedures that are tailored to its business.

Standard #7: Automated Portfolio Surveillance Systems

Monitoring and analyzing trading and investment activities are essential to detect possible violations and possible deviations from a client’s investment objectives, risk tolerances, or firm policies. The task of manually monitoring firm trading activity can be complicated, prone to errors, and labor intensive. Industry best practice is for investment advisers to utilize an automated pre-trade and post-trade portfolio compliance surveillance tool to accomplish this objective.

Minimum Standard: Advisers should have an automated portfolio compliance surveillance system.

Standard #8: Controls over Trading Practices

Deficiencies in controls over trading practices could lead to significant regulatory risk, excess costs incurred by portfolios, and an inability for the adviser to meet its fiduciary responsibility. An Investment Adviser has a fiduciary duty to seek best execution for client trades, including the consideration of the competitiveness of commissions paid and the value of research received if applicable. Trades executed are required to be fairly allocated to all clients. Appropriate controls should also be in place to monitor and/or prohibit insider trading.

Minimum Standard: Clear establishment, adoption and execution on controls over trading, best execution, client commission usage, trade allocation, and insider trading.

Standard #9: Business Continuity Plan

Business continuity plans are essential components of a firm’s compliance program. An investment adviser has an obligation to clients to take steps to protect the clients’ assets from being placed at risk as a result of the adviser’s inability to provide advisory services after a natural disaster or other catastrophic event. If a business continuity plan does not exist or is materially deficient, this would put Prudential assets at risk if the adviser ceases operations. Among other things, this would include planning for an alternative continuity space, timely data back-up, and ongoing testing efforts. The plan should provide for timely ability to resume key business efforts in support of client portfolios.

Minimum Standard: Establishment of a formal business continuity plan which is approved by senior management and regularly reviewed and tested.

Standard #10: Regulatory History / Litigation Matters

Small firms with ongoing regulatory investigations or material litigation matters have increased risk of failing financially or suffering irreparable harm to their reputation.

Minimum Standard: The adviser should not have any significant exposure to regulatory inquiries and/or material litigation matters.