SEC Will Confirm Assets of Investors in Hedge Funds Managed by Registered Investment Advisers as Part of Adviser Examinations
Senior SEC officials announced at a recent Managed Funds Association seminar that as part of the routine examinations of registered investment advisers the SEC staff will seek confirmations from investors in hedge funds managed by the advisers of cash and securities held by advised clients. In a follow up letter to the MFA, the SEC said that as part of its examination of registered investment advisers it must perform a valid verification of assets.
In order to do this, SEC staff must request independent confirmation of investor assets from various third parties. As such, the SEC said that it may contact a number of entities and persons to confirm the existence of assets managed by the investment adviser being inspected, including banks, brokers, derivatives counterparties, investors in hedge funds managed by the adviser, and hedge fund managers.
In these requests, SEC staff will seek confirmation from third parties of cash and securities held by advised clients as of specific dates and of transactions in such accounts over a period of time. In requesting confirmation from advisory clients, the SEC staff will ask clients to confirm that their account balances as of a specific date were consistent with their records and that their contributions to, and withdrawal from, their accounts over a period of time were transactions they authorized. In requesting confirmations from investors in hedge funds managed by registered investment advisers, the SEC staff will request that such investors confirm that their capital account balances, as shown by the funds’ records, are consistent with the investors’ records.
The account confirmation requests should not be considered as an indication by the SEC that any violations have occurred, assured the Commission, nor should they be construed as an adverse reflection on the investment adviser or any person associated with the adviser. The SEC’s examinations are non-public and the staff’s communications with these unaffiliated entities are also non-public.