Point72, the firm set up by hedge fund tycoon Steven A Cohen, is determined to set the highest possible compliance standards as it works towards possibly taking in external client money. This publication interviewed its surveillance and compliance chief.

(Republished after coding change)

Point72 Asset Management, the family office of prominent hedge fund industry figure Steven Cohen, has been expanding and this publication recently heard about its plans for London. This business has also been going through an extensive process to improve its compliance processes, with a possible view to being able to take on board external clients’ money at some stage, following a settlement with authorities in the US.  Cohen’s old firm, SAC Capital Advisors, no longer takes in external client money as part of a deal with US regulators concerning shortcomings at SAC. That old firm is now running down legacy client business, while the money of Cohen’s family is held in Point72. The very existence of Point72 is also an example of how a number of hedge fund businesses have, for different reasons, morphed into family offices over recent years (see more on this trend here).

The firm’ chief compliance and surveillance officer Vincent Tortorella, was questioned by Family Wealth Report about the work the firm is doing and he has an impressive resumé: He is a former Assistant US Attorney and member of the Department of Justice. Tortorella joined Point72 in April 2014 to create and lead a surveillance unit, which was later merged with the firm’s compliance group under Tortorella’s leadership. He previously worked at Coatue Management as the general counsel and head of proprietary research. He was previously the chief operating officer and general counsel at Guidepoint Global in New York. Other roles have included those of a trial attorney in the criminal division of the US Department of Justice in Washington, DC, and has served as an Assistant United States Attorney for the Southern District of New York. 

In general terms, we have seen that Mr Cohen and his businesses have received approval from regulators that he could, subject to certain tests, be able to manage outside money as soon as 2018. First of all, could you outline what these tests are and what they are for?

Under the terms of the settlement agreement, provided that we maintain our world-class compliance programs and continue to adhere to the high ethical standards defined by our Mission and Values, we should be in a position to be able to manage outside capital, as soon as January 1, 2018

In general, what sort of compliance requirements does Point72 have to meet as part of the agreement with the SEC? Do they differ from the industry as a whole? 
At Point72, we think of compliance in-terms of a bigger universe. You need a strong compliance program no matter what kind of firm you are, but the challenges faced by any compliance program are made harder or less difficult by the atmosphere in which a program works and the leadership it has to serve. If a company or firm has made a strong compliance program a high priority and if the firm highly values ethical behavior, a compliance team has a different set of circumstances under which to work than it does if the reverse is true.

In the aftermath of SAC’s settlement, one of the things Steve Cohen, and our president,  Doug Haynes, did was take a hard look at the firm, what we were doing right, what we needed to do better, and what the health of the Firm’s culture was. You probably know that under the terms of SAC’s settlement with the government, the firm had a government selected compliance monitor. What might be less well known to you is that, on its own, the firm hired another compliance expert, Patomak Partners, led by former US SEC Commissioner Paul Atkins to do an in-depth review of our compliance program. They gave us pretty good marks in large part because of a series of deliberate and intentional changes we had made on our own. I’ll get to that those changes in a minute.

Steve and Doug also asked the firm’s employees to articulate what it is we stood for, what we thought our values are. Nearly half of the Firm took part in this effort and we came up with this as our mission:
“To be the industry’s premier asset management firm through delivering superior risk-adjusted returns, adhering to the highest ethical standards and offering the greatest opportunities to the industry’s brightest talent.”

Reporters usually roll their eyes at mission statements, but this is particularly relevant, because it has framed our efforts for the past two years. And if you look at the emphasis on the highest ethical standards, then what I’m about to tell you about what we did will make more sense.

As with every other firm, Point72 abides by the laws and regulations in the countries in which we operate, but we don’t stop there.  As we say in the firm’s Canon of Professional Standards, which complements our mission and values and our compliance manual, “we all believe that the firm’s management and personnel must go beyond this baseline, adhere to the highest ethical standards, and behave with exemplary professionalism at all times.”

We want to be seen as the standard by which asset management compliance is measured.  Our approach, therefore, begins with the tone set at the top –as our mission and values clearly articulate - we view adherence to the highest ethical standards to be entirely consistent with, and in fact supportive of, superior performance, a  message reinforced by Steve,  Doug, and the entire management team. To give you one very concrete example, Steve has empowered the Compliance team to veto a prospective hire if we determine there are causes for concern.

On a more nuts and bolts level, we want to understand the potential risks posed by our employees and those that we do business with. When we identify risks, Point72 compliance intervenes to prevent an actual problem from developing and then keeps a close eye on the situation. 

We can be successful because we make sure we have the right human and technological systems to identify potentially suspicious communications and trades to ensure that our investment professionals adhere to not only the letter of the law and our compliance manual, but our canon. During the past three years, we have invested heavily in making sure we have the right software and people in compliance.
The only way in which Point72’s compliance picture differs from other companies is that under the terms of the recent settlement with the SEC, Point72 will have a compliance monitor observing the firm. As I said earlier, the firm has made a strong compliance program one of our highest priorities.

Please outline what is being done in terms of compliance and monitoring of investments. And do please give some specific examples where you think they are relevant.
In 2014, the firm set an industry precedent when it created a brand new position, chief surveillance officer, to complement the traditional compliance function. The purpose of the CSO was to build a best-in class surveillance function in addition to compliance. I had the honor of being hired to fill that new role and later we consolidated the two units into one under my leadership.

One of the reasons I was hired was my background as a former federal prosecutor for the US Department of Justice and as an Assistant US Attorney in the Southern District of New York. It reflected the emphasis Steve Cohen was putting on making sure we had the right approach to compliance. 

While this was happening, the firm expanded its compliance headcount by approximately 25 per cent and has, to the best of my understanding, one of the largest compliance teams in the industry. 
Traditional compliance approaches tend to look at post-trade events; a trade happens, a stock moves a lot, and the compliance team looks back at figuring out what happened. We decided that technology could give us a look-forward capacity to add to this traditional approach that would give us the chance to intervene if we saw something that looked potentially problematic before it actually becomes a problem. It also gave us the chance to do much shrewder analysis when we did do a look back. 

As has been reported publicly, we use software programs developed by Palantir, which is a company used by the SEC, FBI and CIA, to understand the patterns in the oceans of data they see every day. We also use other software, some of which we purchased and other programs we built ourselves.

Data is only as good as the people who monitor it and we decided to increase our analytical muscle by hiring people who are extremely well-versed in data analysis. We went to the “letter agencies” – the CIA, FBI, and SEC – and we hired people from them to evaluate the information that our technology generates.

We didn’t stop there. We have compliance professionals who perform due diligence on all third-parties who provide research and execution services to the firm, including sell-side firms, independent research providers, and data vendors. As CNBC has reported, we have ended relationships with providers that do not meet our exacting requirements. 

We have senior compliance professionals who are embedded with our risk and sector executive management teams, and maintain a regular dialogue with all of our investment professionals. Our compliance program extends to all parts of our business.  Our main franchise is our long/short discretionary teams, and all of this pertains to it, but we have also made a tremendous investment in software and experienced compliance professionals who monitor our quantitative systematic strategies to ensure that our trading does not have an adverse effect on the market, and to ensure that we don’t have any “algorithms that go haywire.”  

Last, in a departure from what I believe is standard industry practice, the firm has empowered compliance to perform due diligence on all of our job candidates and has an absolute veto in the hiring process. We look to determine whether these candidates have demonstrated adherence to our high ethical standards in their professional lives prior to applying for a role here.    
 

What lessons are you learning already about the challenges of compliance in the current market environment? What has proven to be the most difficult issue? 
The two most difficult issues are related. First, the volume of data that we have to monitor and synthesize is staggering - thousands of trades and millions of electronic communications flow through the firm every month, and making sense of this flood of data is a herculean challenge. Second, we can’t control third parties, and protecting our investment professionals from inbound information - whether it is truly problematic or simply drafted in such a way as to appear problematic - is a constant challenge. 

We meet this challenge in a few ways. We train our investment professionals on what to look for, and we maintain a regular and open line of communication with them to help answer their questions when they receive information that they are unsure about. We’ve introduced sophisticated systems that use natural language processing to sift through the millions of electronic communications we receive to flag suspicious content. And, we perform due diligence on all of our research providers, ensuring that we’re comfortable that their standards meet our Point72 standards for compliance.  Where a vendor fails to meet our standards, or where they demonstrate that they cannot consistently adhere to their own standards as articulated to us, we terminate the relationship. As I noted before, has CNBC reported on that reality.

How much resource in terms of technology and people is involved in your compliance efforts? What has been the most difficult resource to obtain?
Steve Cohen has been unstinting in his devotion of resources to compliance, whether you talk about spending on systems or personnel. Perhaps more important, he has been adamant in demonstrating to the firm that  he supports our mission and that he expects every person here adheres to our rules and expectations.  

As I noted, earlier, we have expanded the overall size of the unit since 2013 by 25 percent. The most difficult resource to obtain is people – you need people who are not only technically proficient, but also share in the mission of the department and the firm. We look for a wide variety of skills and experience for the different groups under our compliance umbrella, but it’s difficult to find people who are both proficient and have a shared sense of mission. 

Do you think there are limits to what can be achieved through technology? How realistic is it to reduce risks of wrongdoing completely? Is there a risk of regulatory overkill, in your firm’s opinion?
There is a limit to what can be achieved through technology alone - which puts a premium of the marriage of technology and human assets. Technology is a force multiplier, but the best technology in the world is wasted if you don’t have the right people taking the outputs from that technology and applying judgement and experience honed through years of practice to understand what the systems are flagging.

No one can reduce the risk of wrongdoing to zero - what we can do is ensure that the firm’s mission and values are understood by everyone at the firm, expect our employees to live by them, make the rules of engagement clear through the canon and compliance manual and make sure compliance is vigilant for any potential departures from these rules and police them if they occur.   

Are there examples from other firms of practice that you think are worth emulating? Are there academic/practical studies and so on that are worth citing?
My answer goes back to our mission and values.  One of the things we value highly is the sense that we aren’t satisfied with the status quo and are committed to pursuing innovation and excellence.  As a result, we are always looking to get better at compliance and surveillance. That’s one of the reasons we review academic literature to try and understand risks, or ways of identifying troubling behavior, that we may not have thought of.  Here’s one example: there have been recent studies exploring a link between insider trading and certain transactions in the options markets. We need to know more about this, so this is something we are exploring now.  We also spend a tremendous amount of time vetting new technology vendors to understand whether there is something new in the market, whether it has a use at asset management firms, and can supplement or replace parts of our software suite.

Regulation and compliance are constantly shifting as new rules in different jurisdictions come along. What do you see as the most important developments?
The biggest shift over the next few years will be using a firm’s data to get an even better picture of the risks facing firms. In addition, we think the approach that we have pioneered from a reactive compliance paradigm to a more interventionist approach will spread. We believe a paradigm that tries to anticipate issues before they metastasize into problems, and intervene as appropriate, will grow.

Given all that Stephen Cohen and colleagues have been through, it might have been tempting to walk away rather than keep a business going and fight back. What is the driving force that motivates Mr Cohen and his team? 
Steve never gave walking away a thought. What he was determined to do was to show the world that our excellence was a function of our integrity. That’s why he invested in the CSO position, Palantir, the additional people and all of the changes we made. As we say in another part of our values, “We are exemplary citizens of the world and contribute to the communities in which we live and work.”
If that is your foundation, you are starting from a good place and when you build on top of it a compliance program that your management team has invested authority and credibility in, and then layer on top of that state-of-the art technology and professionals who are among the best in their fields, you have a Firm that meets the standards Steve and our colleagues have demanded.